Question

There are few, if any, real companies with negative betas. But suppose you found one with β = −.19

a-1. How would you expect this stock's rate of return to change if the overall market rose by an extra 5%? (A negative answer should be indicated by a minus sign. Input your answer as a percent rounded to 2 decimal places.)

Change in stock's rate of return             %

a-2. How would the stock's rate of return change if the overall market fell by an extra 5%? (Input your answer as a percent rounded to 2 decimal places.)

Change in stock's rate of return             %

        

b. You have $1 million invested in a well-diversified portfolio of stocks. Now you receive an additional $20,000 bequest. Which one of the following actions will yield the safest overall portfolio return?

Answer 1

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Answer:

a-1. Change in stock’s rate of return = .05 × –.19 = –.0095, or –0.95%

a-2. Change in stock’s rate of return = –.05 × –.19 = .0095, or 0.095%

b. “Safest” means the stock with lowest amount of risk.

=> Assuming the well-diversified portfolio is invested in typical securities, the portfolio beta is approximately one.

The largest reduction in beta is achieved by investing the $20,000 in a stock with the negative beta.

Hence , option with beta negative is correct