2. Stock betas (S8.1) There are few, if any, real companies with negative betas. But suppose you found one with β = –0.25.

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 = –0.25.

Explain your answer.

Chapter 8 The Capital Asset Pricing Model 243