Question 1:

(a) There are few, if any, real companies with negative betas. But suppose you found one with β= -0.25. How would you expect this stock's rate of return to change if the overall market rose by an extra 5 percent? What if the market fell by an extra 5 percent?

(b) You have Rs1 million invested in a well-diversified portfolio of stocks. Now you receive an additional Rs. 20,000 bequest.

Which of the following actions will yield the safest overall portfolio return?

(i) Invest Rs. 20,000 in Treasury bills (which have β = 0).
(ii) Invest Rs. 20,000 in stocks with β = 1.
(iii) Invest Rs. 20,000 in the stock with β = -0.25.

(c) Diversification has enormous value to investors, yet opportunities for diversification should not sway capital investment decisions by corporations. How would you explain this apparent paradox?