You have found a stock with a beta lower than any other stock in your portfolio.

Question

You have found a stock with a beta lower than any other stock in your portfolio. This stock also has a very high return. However, the stock has a history of high variability of returns. If you do not want to increase the risk of your portfolio, are you interested in this stock? a. Yes, because a low beta will lower the portfolio beta (i.e., risk), and the other variability (variance) specific to this stock will be diversified away. The most likely outcome will be a higher return and lower portfolio variance. b. No, because the high variability of returns would increase my portfolio variance. c. Uncertain, because I would have to weigh the higher return against the higher portfolio variance. d. No, because a lower beta would cause my portfolio to be more defensive, an undesirable result even given a higher return.

Explanation / Answer

answer is c. Uncertain, because I would have to weigh the higher return against the higher portfolio variance.

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