Question

What is the LOWEST RISK based on the choices below?

Buying ONE stock with a beta of 1.0

Buying two stocks in different industries that opposing Betas

Buying 50 shares of FB with a beta of 1.3 and 50 shares of Twitter with a Beta of .9

What is the LOWEST RISK based on the choices below?

A 10 year U.S. Gov’t Bond.

Buying two stocks in different industries that opposing Betas

An Index fund like the S&P 500

Answer 1

1)

Option1: Beta = 1
Option2: Two stocks with opposing beta, example 50 shares of beta 1.5 and 50 shares of beta
-1.5. So beta of portfolio is zero.
Option3: Combined portfolio beta is (50/100)*1.3+(50/100)*0.9 = 1.10

So option 2 is least risky

2)

Option1: US Govt. 10 year bond is risk free
Option2:Two stocks with opposing beta, example 50 shares of beta 1.5 and 50 shares of beta
-1.5. So beta of portfolio is zero. As per CAPM the Return on equity should be Rf
Option 3: Index fund will have market risk

Since market is imperfect, least risky is Option 1