Adding investment with a negative beta to a well-diversified portfolio that curr
ID: 2821242 • Letter: A
Question
Adding investment with a negative beta to a well-diversified portfolio that currently has a beta of +1.0 will
Cause the expected performance of the portfolio to improve in bear markets
Cause the expected performance of the portfolio to decline in bear market
Cause the portfolio to experience more volatility in times of a bull market
Cause the portfolio to experience more volatility in times of a bear market
Which of the following pairs of assets provides the greatest level of diversification
Assets 1 and 2, with a correlation coefficient of 0.37
Assets 3 and 4, with a correlation coefficient of 0
Assets 5 and 6, with a correlation coefficient of -0.42
Assets 7 and 8, with a correlation coefficient of -0.78
Use this information to answer questions 18 and 19: Portfolio has a standard deviation of 55% and the market has a standard deviation of 40%. Assume that the correlation coefficient between Portfolio A and the market is 0.50.
What is the percentage of the total return of portfolio A is unsystematic risk?
25%
50%
75%
100%
What portfolio measures is best used to evaluate the performance of portfolio A?
Sharpe ratio
Jensen’s alpha
Treynor ratio
Information ratio
Explanation / Answer
Since, multiple questions have been posted, I have answered the first one.
_____
Cause the expected performance of the portfolio to improve in bear markets. (which is Option A)
_____
Explanation
An investment with a negative beta:when added to a well-diversified portfolio of investments will tend to cause a decline in the value of portfolio when markets rise (bull markets) and improve the value of the portfolio when the markets decline (bear markets). Therefore Option A is correct and Option B is incorrect.
As the value of the negative beta (in the given case) is 1, it means that the stock will decline in line with the market. As a result, it is not likely to cause the portfolio to experience more volatility times of a bull/bear market. Therefore, Option C and Option D are not correct.
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