Which of the following statements is CORRECT?
A) 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.
B) 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.
C) The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
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.
E) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

Question

Quizplus · Accepted Answer

The correct statement is B. Beta is found by regressing past returns on a stock against past market returns. While one could construct a scatter diagram, the slope of the line of best fit would not necessarily be the same as the beta used in the future. A is incorrect because a zero beta stock does not necessarily mean a riskless portfolio. C is incorrect because the beta of a portfolio may be lower than some individual stocks depending on the weights of the stocks in the portfolio. D is incorrect because a beta of 1.0 means the stock is as risky as the overall market, not risk-free. E is incorrect because the beta of a portfolio of stocks may be higher than some individual stocks depending on the weights of the stocks in the portfolio.

Which of the Following Statements Is CORRECT