You sell some of your Chapters common stock (which tends to move up and down with the economy as a whole) and replace it with the common stock of El Dorado Gold Mining, Inc. (whose
Shares tend to rise when the economy falls, and vice versa). Your portfolio's beta should
_______________.
A) Increase.
B) Decrease.
C) Remain unchanged.
D) Either increase or decrease.
E) Deﬁnitely exceed the beta of the market when all is said and done.

Question

Quizplus · Accepted Answer

It is known that the beta of Chapters common stock tends to move up and down with the economy, which means that its beta is positive. On the other hand, El Dorado Gold Mining's beta is negative, meaning that its stock tends to move in the opposite direction of the economy. By replacing some of the Chapters common stock with El Dorado Gold Mining's stock, the portfolio's beta will decrease because the negative beta of El Dorado Gold Mining will offset the positive beta of Chapters. Therefore, option B is the best choice.

You Sell Some of Your Chapters Common Stock (Which Tends