Asked by Queen Owusu on Jul 06, 2024
Verified
Margaret has a portfolio consisting of a risk-free asset and a stock with a beta of 1.5. If she wishes to lower the overall beta of her portfolio Margaret could _____ the portfolio weight of the risk-free asset and _____ the portfolio weight of the stock.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increase; not change
Portfolio Weight
The proportion of a specific asset within an investment portfolio relative to the total asset value of the portfolio.
Beta
A measure of a stock's volatility in comparison to the overall market, indicating its relative risk.
- Elucidate the definition of portfolio beta, illustrate the procedure for its calculation, and discuss its importance in the context of diversification.
- Comprehend the fundamentals of diversification and its impact on portfolio risk management.
Verified Answer
ZK
Zybrea KnightJul 08, 2024
Final Answer :
B
Explanation :
To lower the overall beta of her portfolio, Margaret could increase the portfolio weight of the risk-free asset (which has a beta of 0, thus reducing the portfolio's overall beta) and decrease the portfolio weight of the stock (which has a beta of 1.5, higher than the market beta of 1, thus reducing its impact on the portfolio's overall beta).
Learning Objectives
- Elucidate the definition of portfolio beta, illustrate the procedure for its calculation, and discuss its importance in the context of diversification.
- Comprehend the fundamentals of diversification and its impact on portfolio risk management.