Question

Which of the following statements is CORRECT?

Select one: a. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

b. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

c. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF.

d. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

e. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.

Answer 1

Statement ( d ) is CORRECT.

The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

Portfolio beta is the weighted average of the beta of teh individual stocks in the portfolio where the weights are the proportion of amounts invested in portfolio for individual stocks. so the portfolio beta can be lesser or higher than the beta of the individual stocks.

Also if a stock has beta of 1 it required rate of return will be equal to the market return.