Problem:
There are few, if any, real companies with negative betas. But suppose you found one With beta = - .25.
a. How would you expect this stock's rate of return to change if the overall market rose by an extra 5 percent? What if the market fell by an extra 5 percent?
b. You have $1 million invested in a well-diversified portfolio of stocks. Now you receive an additional $20,000 bequest. Which of the following actions will yield the safest overall portfolio return?
i. Invest $20,000 in Treasury bills (which have beta = 0).
ii. Invest $20,000 in stocks with beta = 1.
iii. Invest $20,000 in the stock with beta; = -.25.
Explain your answer.