What is the risk premium of a zero-beta stock? Does this mean you can lower the

Question

What is the risk premium of a zero-beta stock? Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the risk-free asset? What is the risk premium of a zero-beta stock? The risk premium of zero-beta stock is (Select from the drop-down menu.) Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the risk-free asset? (Select the best choice below.) Yes, because a zero-beta stock has the same expected return as the risk-free asset, but has higher volatility. No. A zero-beta stock must be negatively correlated with the other stocks in the portfolio. Thus, it offsets risk that other stocks have so replacing it with the risk-free asset will increase volatility. No, the zero-beta stock is part of the market portfolio, so because you cannot do better than the market, you must hold it as part of your portfolio. Yes, you are always better off substituting risky assets with risk-free assets.

Explanation / Answer

The risk premium of Zero beta stock is Zero as zero-beta portfolio would have the same expected return as the risk-free rate.

B) No.A zero beta stock must be negatively correlated with the other stock in portfolio.Thus,it offset risk that other stocks have so replacing it with the riskfree asset will increase the volatality

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