Which of the following factors influence portfolio beta?

A. Portfolio size

B. Investment longevity

C. Trading volume

D. Return interval (weekly vs. monthly)

E. Portfolio leverage

Choose the correct answer from the options given below:  

This question was previously asked in
UGC NET Paper 2: Commerce 4th March 2023 Shift 2
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  1. A, B and C only
  2. B, C and D only
  3. D and E only
  4. A, B, C and D only

Answer (Detailed Solution Below)

Option 4 : A, B, C and D only
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UGC NET Paper 1: Held on 21st August 2024 Shift 1
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Detailed Solution

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The correct answer is A, B, C and D only.

Key Points

  • Correct options
    • Portfolio Size: Even though the size of a portfolio (total number of different investments) doesn't directly affect portfolio beta (risk compared to the market), a larger portfolio usually consists of a diverse set of investments. This diversity can balance out risks, leading to a change in the overall beta of the portfolio.
    • Investment Longevity: This refers to how long you're investing for. Although it doesn't directly affect the beta, the duration of the investment might influence the data used to calculate the beta. For instance, if you calculate the beta using ten years of data instead of only five, the different market conditions over these periods could lead to a slightly different beta.
    • Trading Volume: This refers to how often stocks in the portfolio are bought and sold. While it doesn't directly affect the calculation of beta, the idea here is that stocks that are traded more frequently might have lower price fluctuations and, by extension, a lower beta.
    • Return Interval (weekly vs. monthly): This is about how frequently you calculate returns (profits and losses) from the investment. Calculating returns more often can capture small changes and make the beta calculation more sensitive to those changes.
  • Incorrect Option:
    • Portfolio leverage: This involves borrowing money to invest, which could potentially increase risk and thus theoretically could affect the beta. However, in this particular context, leverage isn't being considered as something that influences the portfolio beta. This might be because it usually impacts another type of beta (known as equity beta) used to measure different kinds of risks.
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