You own an equally-weighted portfolio consisting of a stock and Treasury bills. You sell a portion of the Treasury bills, and invest in Stock M, which has a positive covariance with the market. The beta of your portfolio will:
A) increase.
B) decrease.
C) remain the same.
D) increase or decrease.
E) decrease or remain the same.

Question

Quizplus · Accepted Answer

Selling Treasury bills and investing in a stock with a positive covariance with the market means that the portfolio becomes more exposed to market risk. As a result, the beta of the portfolio will increase.

You Own an Equally-Weighted Portfolio Consisting of a Stock and Treasury