Asked by Gavin Laielli on Apr 28, 2024
Verified
Which of the following statements is correct?
A) Collections Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Collections' revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.
B) Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the negative beta will be negatively correlated with returns on most other stocks in the market during that 5-year period.
C) Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
D) You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should rebalance your portfolio to include more high-beta stocks.
High-Beta Stock
Stocks that have a higher volatility compared to the market, often experiencing larger fluctuations in price than the overall market.
Recession
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
Investor Sentiment
The overall attitude of investors towards a particular security or financial market, which can influence trading decisions and market movements.
- Analyze the effects of economic recessions on both diverse and singular investment portfolios.
- Understand the importance of negative beta values and their contribution to diversifying a portfolio.
Verified Answer
MA
Mariajose ArangoApr 28, 2024
Final Answer :
B
Explanation :
A beta of -0.6 suggests that the stock moves in the opposite direction of the market, so when the market returns are positive, returns on this stock will be negative, and vice versa. Therefore, its returns will be negatively correlated with most other stocks in the market.
Learning Objectives
- Analyze the effects of economic recessions on both diverse and singular investment portfolios.
- Understand the importance of negative beta values and their contribution to diversifying a portfolio.