Beta, Risk adverse
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A. 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?
b. 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. From the investment instruments in the simulation, is it possible to construct a portfolio that is risk free? Explain
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Solution Summary
Answers 2 questions:
1) If the portfolio has a stock with a relatively high beta of 1.4 and currently doing exceedingly well, why would one want a stock in the portfolio with a relatively low beta of 0.7 that has been recently under-performing.
2) If a person is relatively risk adverse, would she require a higher beta stock to induce her to invest than the beta required by a person more willing to take risks
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