Which of the following will always lower the beta of a portfolio that currently stands at 1.0?
I. Diversify among different types of securities and across industry and geographic lines.
II. Add investments with low betas to the portfolio.
III. Hold more cash or Treasury Bills in the portfolio.
IV. Reduce the percentage of the portfolio invested in high beta securities.
A) I, II and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV

Question

Quizplus · Accepted Answer

Adding investments with low betas, holding more cash or Treasury Bills (which have a beta of 0), and reducing the percentage of the portfolio invested in high beta securities will all directly lower the portfolio's beta. Diversification can manage and reduce risk but does not inherently lower a portfolio's beta, especially if the diversified assets themselves have varying betas that average out to the portfolio's current beta.

Which of the Following Will Always Lower the Beta of a Portfolio