Biosig$-$ID ${?}^{TM}$ here.

Question $20$

$2$ pts

Which of the following statements is CORRECT?

You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re$-$balance your portfolio to include more high$-$beta stocks.

Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is$,$ you are convinced that the market is about to rise sharply. You should sell your high$-$beta stocks and buy low$-$beta stocks in order to take advantage of the expected market move.

Suppose the returns on two stocks are negatively correlated. One has a beta of $1\mathrm{.}2$ as determined in a regression analysis using data for the last $5$ years, while the other has a beta of $-0\mathrm{.}6.$ The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that $5-$year period.

If the market risk premium remains constant, but the risk$-$free rate declines, then the required returns on low$-$beta stocks will rise while those on high$-$beta stocks will decline.