There are few, if any, real companies with negative betas. But suppose you found one with β = -.25.
a. How would you expect this stock’s rate of return to change if the overall market rose by an extra 5%? What if the market fell by an extra 5%?
b. You have $1 million invested in a well-diversified portfolio of stocks. Now you receive an additional $20,000 bequest. Which of the following actions will yield the safest overall portfolio return?
i. Invest $20,000 in Treasury bills (which have (β = 0).
ii. Invest $20,000 in stocks with β =1.
iii. Invest $20,000 in the stock with β = -.25.
Explain your answer
Correlation Coefficients | |||||||||
BP | Canadian Pacific | Deutsche Bank | Fiat | Heineken | LVMH | Nestle | Tata Motors | Standard Deviation | |
BP | 1 | 0.19 | 0.23 | 0.20 | 0.34 | 0.30 | - 0.16 | 0.09 | 22.2% |
Canadian Pacific |
| 1 | 0.43 | 0.31 | 0.39 | 0.34 | 0.17 | 0.40 | 23.9 |
Deutsche Bank |
|
| 1 | 0.74 | 0.73 | 0.73 | 0.49 | 0.68 | 29.2 |
Fiat |
|
|
| 1 | 0.66 | 0.64 | 0.47 | 0.53 | 35.7 |
Heineken |
|
|
|
| 1 | 0.64 | 0.51 | 0.50 | 18.9 |
LVMH |
|
|
|
|
| 1 | 0.52 | 0.60 | 20.8 |
Nestle |
|
|
|
|
|
| 1 | 0.43 | 15.4 |
Tata Motors |
|
|
|
|
|
|
| 1 | 43.0 |
* TABLE 7.9 Standard deviations of returns and correlation coefficients for a sample of eight stocks.
Note: Correlations and standard deviations are calculated using returns in each country’s own currency; in other words, they assume that the investor is protected against exchange risk.
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