Margaret has a portfolio consisting of a risk-free asset and a stock with a beta of 1.5. If she wishes to lower the overall beta of her portfolio Margaret could _____ the portfolio weight of the risk-free asset and _____ the portfolio weight of the stock.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increase; not change

Question

Quizplus · Accepted Answer

To lower the overall beta of her portfolio, Margaret could increase the portfolio weight of the risk-free asset (which has a beta of 0, thus reducing the portfolio's overall beta) and decrease the portfolio weight of the stock (which has a beta of 1.5, higher than the market beta of 1, thus reducing its impact on the portfolio's overall beta).

Margaret Has a Portfolio Consisting of a Risk-Free Asset and a Stock