Purchase Solution

Beta and Risk

Not what you're looking for?

Ask Custom Question

1) If one of your stocks has a relatively high beta of 1.4 and is currently doing exceedingly well, why would you want a stock in your portfolio with a relatively low beta of 0.7 that has been recently under-performing? By diversifying your investments according to betas, have you entirely removed the potential risk of losses due to a declining stock market?

2) If you are relatively risk adverse, would you require a higher beta stock to induce you to invest than the beta required by a person more willing to take risks? Explain. Is it possible to construct a portfolio that is risk free? Explain.

Purchase this Solution
Solution Summary

The solution evaluates the risk of two stocks based on their beta coefficients and recommends whether they should be included in a portfolio

Solution Preview

See attached file where formatting has been conserved.
1) If one of your stocks has a relatively high beta of 1.4 and is currently doing exceedingly well, why would you want a stock in your portfolio with a relatively low beta of 0.7 that has been recently under-performing? By diversifying your investments according to betas, have you entirely removed the potential risk of losses due to a declining stock market?

The stocks are risky because the returns are uncertain. There is a spread of possible returns. The risk of any stock has two parts: unique risk (or unsystematic risk) that is peculiar to that stock and market risk (or systematic risk) that is associated with market wide variations (advances and declines of the market). An investor can eliminate unique risk (or unsystematic risk) by holding a well diversified portfolio. It is not possible to eliminate market risk (or systematic risk).

Thus it makes sense to have different stocks in the portfolio for the purpose of diversification which eliminates the unique risks of holding ...

Purchase this Solution
Free BrainMass Quizzes
Motivation

This tests some key elements of major motivation theories.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

View More Free Quizzes
Related BrainMass Solutions

  • Corporate Risk: How would you describe beta? When would you use beta?

    A division with beta less than the beta of the company would have a lower level of risk as compared to the company and a division with beta higher than the beta of the company would have a higher level of risk.

  • Beta and Expected return

    214193 Beta and Expected return I have a two-part question: I would like help figuring the BETA of my stock that has an expected return of 14%, a risk-free rate of 4% and a market risk premium of 6%.

  • Portfolio Return and Standard Deviation

    ____________________ 4) What is the portfolio beta if you invest 35% in A, 45% in B and 20% in the risk-free asset? 5) What is the portfolio expected return if you invest 35% in A, 45% in B and 20% in the risk-free asset?

  • Change in risk premium with change in risk aversion

    Suppose their the two stocks one with beta 0.5 and another with beta 2.0 Increase in risk premium on stock with beta 0.5 = 0.5*(10%-5%)=2.5% Increase in risk premium on stock with beta 2 = 2.0*(10%-5%)=10% Thus the increase is more for high beta stocks

  • Solving for beta in capital asset pricing model

    171387 Solving for beta in capital asset pricing model The risk free rate is 5% and the market risk premium is 10%. The Ka equals 25% and the Kb equals 20%.

  • The Importance of Beta

    The average risky asset refers to the market beta, and market beta always equals one (bM = 1). A stock with a lower risk has a beta below 1, and a stock with a higher risk has a beta of over 1.

  • Capital Asset Pricing Model; Risk Return Analysis

    This line begins at the risk-free rate and rises with beta. Plotted in excel: (please see the attached file) If Tony is unwilling to take more than average risk, the highest return that he can expect will correspond to beta equal to 1.

  • Risk Management: diversify by betas; can a portfolio be risk free?

    The 374 word solution explains about risk and beta in response to the questions below.

  • Risk, beta and exchange rate risk

    The solution explains systematic risk, non-systematic risk, unlevered beta, levered beta and how to limit foreign exchange risk.

  • Calculating Risk Using Beta & Standard Deviation of Return

    Questions on risk (as measured by beta and standard deviation of return) and return have been answered clearly and extensively in words with references.

View More Related Solutions