Which of the following statements is correct?
A) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.
B) If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.
C) The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.
D) It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free
(default-free) rate of return, rRF.

Question

Quizplus · Accepted Answer

The statement in option C is correct as it explains one of the common methods used to calculate beta, but also notes that historical beta may not be indicative of future beta. Option A is incorrect as the beta of a portfolio can be greater or smaller than the betas of the individual securities. Option B is incorrect as a zero beta stock does not necessarily imply a riskless portfolio. Option D is partially correct, but incomplete as it does not mention the market risk premium, which is also factored into the required rate of return calculation in the CAPM model.

Which of the Following Statements Is Correct