Question

Betas and risk rankings   Personal Finance Problem   You are considering three stocks A, B, and C — for possible inclusion in your investment portfolio. Stock A has a beta of 1.5, stock B has a beta of 1.2, and stock C has a beta of −0.3.

a. Rank these stocks from the most risky to the least risky.

b.  If you believed that the stock market was getting ready to experience a significant decline, which stock should you add to your portfolio?

c.  If you anticipated a major stock market rally, which stock would you add to your portfolio?

a.  Which stock is the most risky one? (Select the best answer below.) A. Stock Upper AStock A B. Stock Upper BStock B C. Stock Upper C

Answer 1

a. Beta is used to measure the risk associated with the investments. Investment with the beta of more than one indicates risk more than the market and high voiatility with the stocks return. In the given question Stock A is the most risky investment with the highest beta of 1.5 and also riskier than average market Stock B is also risky than the average market but less risky than the stock A with the beta of 1.2. Stock C is the least risky with the negative beta of 0.3.

Stock A is the most risky one.

b. If stock market is ready to experience a decline then stock C is most preferable. Because its beta is negative . Negative beta shows inverse relationship between stock and market. If market declines the stock will give a positive return.

C. If it is anticipated a major stock market rally than stock A is most preferable because its beta is highest.In the situation of anticipated market rally stock A will give return more than the average return in the market because of its high beta.