You manage your own portfolio of about twenty stocks.One of which is Honda Motors.The returns on Honda tend to move up and down with the economy as a whole.You decide to sell Honda and replace it with the common stock of Repo-Man Inc.,an asset recovery company.Repo-Man's shares tend to rise when the economy falls,and vice versa.Your portfolio's beta should:
A) Decrease
B) Increase
C) Remain unchanged
D) Either Increase or Decrease

Question

Quizplus · Accepted Answer

If a stock's returns move up and down with the economy, then the Beta is positive. Honda's Beta is positive.
If a stock's returns move inversely with the economy, then the Beta is negative. Repo-Man's Beta is negative.
A portfolio's Beta is a weighted average of the betas of all the stocks in the portfolio. If you replace a positive beta with a negative beta, then the weighted average will fall.

You Manage Your Own Portfolio of About Twenty Stocks