video lesson #3

Suppose the beta of stock A is 1.

According to the video, this implies that the stock has volatility as the overall stock market.

Read the following passage of text and then answer the question that follows.

While the standard deviation of expected returns of a single stock can measure the risk of a single stock held in isolation, this measure of risk becomes less useful in the context of a portfolio of stocks. This is because most investors will hold large, diversified portfolios of stock (a market portfolio), thereby reducing risk until only the market risk remains. Thus, the relevant risk to consider is not the standard deviation of a stocks expected returns, but its influence on the portfolios overall market risk.

To measure a stocks influence on market risk, as you learned in the previous video, a stocks beta is estimated. A stocks beta is a measurement of how a stocks price moves in tandem with the broader stock market. When adding a stock to a portfolio, the beta of the portfolio will change in accordance with the beta of the stock that was added. Adding a stock with a beta that is greater than that of the portfolio will increase the beta (and risk) of the portfolio. Likewise, adding a stock with a beta that is less than that of the portfolio will decrease the beta (and risk) of the portfolio.

Suppose you are adding a stock with a beta of 0.2 to a portfolio that presently has a beta of 1.

After adding the stock to the portfolio, the beta of the portfolio will , all else equal.