QUESTION 16 3 points Save An You have found a stock with a beta lower than any o

Question

QUESTION 16 3 points Save An You have found a stock with a beta lower than any other stock in your portfolio. This stock also has a very higlh 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? 0 a. Yes, because a low beta will lowerthe 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. Ob. No, because the high variability of returns would O c. Uncertain, because I would have to weigh the O d. No, because a lower beta would cause my increase my portfolio variance higher return against the higher portfolio variance portfolio to be more defensive, an undesirable result even given a higher return

Explanation / Answer

We know that an investor is paid only for assuming market risk. Stock specific risk can be diversified away.
Hence this stock will reduce portfolio beta and variance can be easily diversified as in a portfolio there are various types of stocks
Hence option a is correct

Option b is not true as variance can be diversified away
c is not true as measure of risk can be beta
d is not corrrect as lower beta of stock comes with higher return which is a win win

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