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Beta of stocks

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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 underperforming? By diversifying your investment according to beta, have you entirely removed the potential risk of lossess due to a declining stock market?

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Solution Summary

The solution analyzes the selection of stocks in a portfolio based on beta of the stocks.

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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). ...

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