Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have found a stock with a beta lower than any other stock in your portfolio. This stock also has a very high return. However,

You have found a stock with a beta lower than any other stock in your portfolio. This stock also has a very high return. However, the stock has a history of high variability of returns. If you do not want to increase the risk of your portfolio, are you interested in this stock? a. Yes, because a low beta will lower the portfolio beta (i.e., risk), and the other variability (variance) specific to this stock will be diversified away. The most likely outcome will be a higher return and lower portfolio variance. b. No, because the high variability of returns would increase my portfolio variance. c. Uncertain, because I would have to weigh the higher return against the higher portfolio variance. d. No, because a lower beta would cause my portfolio to be more defensive, an undesirable result even given a higher return.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Frederic S. Mishkin, Stanley G. Eakins

5th edition

321280299, 321280296, 978-0321280299

More Books

Students also viewed these Finance questions

Question

What is the difference between Significant and Catastrophic Impact?

Answered: 1 week ago