Question

There are few, if any, real companies with negative betas. But suppose you found one with β = −.22

a-1. How would you expect this stock's rate of return to change if the overall market rose by an extra 8%? (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 8%? (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

a-1. change in stock's rate of return = beta * raise in market.

=>-0.22 *(8%)

=>-1.76%.

change in stock's rate of return = -1.76%........(decrease since it is a negative beta stock).

a-2.if market fell by an extra 8%.

=> chage in stock' s rate of return = -0.22 *- 8% =>1.76%.

change in stock's rate of return = 1.76%...........(increase).

b.Invest in negative beta stock.

Since it is a well diversified portfolio, risk is already well diversified, further reduction of risk (i.e beta ) will be acheived by investing in negative beta stock.