Question

There are few, if any, real companies with negative betas. But suppose you found one with β = −.06 a-1. How would you expect this stock's rate of return to change if the overall market rose by an extra 6%? (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 6%? (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

Answer page:01 1. From the problem. ca-1) change in stock's rate of rieturen = beta x raise in market. = -0.06 x ( 6:10) = -0,36•1. change in stock 's rate o return T-0.36% I decrease since it is a negative 1 beta stock) a-2) if market is spell by an extra 64. change ºn stock's rate of retwin = -0.06% -6.1. = 0.364.(increase) change in stock's seate $ sieteorin 10,36l. b) invest in negative beta stock since it is a well diversified portfolio, stisk is already well diversified, further reduction of risk (ie beta) will be achieved by investing in n'égative beta stock.