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

Bridget Perdomo · Accepted Answer

Final Answer : B, Explanation :  By replacing stock from Chapters, which moves with the economy, with stock from El Dorado Gold Mining, which tends to move inversely to the economy, you are diversifying your portfolio and reducing its overall volatility in relation to the market. This action should decrease your portfolio's beta, which measures the portfolio's sensitivity to market movements.

Definitions

Learning Objectives

Learning Objectives

Related questions