Question

You are a retail investor and trading shares on Robinhood (TM). You believe that after a...

You are a retail investor and trading shares on Robinhood (TM). You believe that after a significant run up in the stock market over the past several months, that stocks in general are becoming over-valued. In fact, you believe the Market is headed lower over the next 12-18 months. It would be most profitable to invest in
Multiple Choice
stocks with high betas
stocks with low betas
Stocks that are not correlated
stocks that consistently plot below the SML (security market line)
stocks that do not pay a dividend

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Answer #1

The correct option is - "stocks with low betas".

Beta is the sensitivity of the stock's returns to the returns of the overall market. If the market falls, investing in stocks with low beta will be profitable.

Option 1 is incorrect. If the market falls, stocks with high beta will fall more than the fall in the overall market.

Option 3 is incorrect. Although this reduces the risk of the overall portfolio, this may not be as profitable as investing in low beta stocks.

Option 4 is incorrect. These stocks are inefficient, and should be avoided.

Option 5 is incorrect. There is no correlation between non-dividend paying stocks and well-performing stocks in a downturn.

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