00:02
So what is beta here, right? so for one stock, in basic terms, right, beta measures the covariance proportional to the market, right? that's roughly the way you can think of it, right, without getting too much into the weeds of technical details, right? the idea is that if a stock has a beta of one, if the stock market goes up 1%, you'd expect that stock to go up 1 % as well.
00:36
But if the stock has a beta of 2, you think it's more volatile than the market.
00:40
If the market goes up 1%, that stock would go up 2%.
00:43
If the market goes down 3%, that stock would probably fall 6%.
00:47
Right? so it's capturing that sort of responsiveness to the level of the market.
00:54
So let's go through each of these and think about what it means for a portfolio, right? that's the question.
01:05
But it's whatever it is, it's got to build on that definition, right? so a is the weighted average of individual betas.
01:21
Now that sounds plausible, right? it sounds pretty plausible because, you know, you're taking sort of a weighted average.
01:28
It makes sense, right? c, so let's continue to keep that one aside.
01:35
B, close to zero, if large portfolio.
01:41
Now, this one is clearly wrong, right? what does large mean anyway, right? large is not rigorously defined.
01:50
Large could mean a lot of money or could it mean many different stocks, right? and even if it is a large portfolio, the stocks may, be highly correlated, right? suppose that you buy only speculative oil companies.
02:07
Well, all those stocks are going to go up and down together, right? so having a large portfolio is not going to give you any diversification.
02:13
It's not going to make your portfolio insulate from market movements, right? so just sort of intuitively you can rule this one out, right? this says that you're guaranteed perfect diversification and you're not.
02:26
C is the highest beta and you're and of course, this has obviously got to be wrong, right? there's nothing plausible about this is here.
02:36
And the classic reason is that it is diversified, right? if you combine a whole bunch of stocks together, you would expect them to have different characteristics, right? imagine that the stock with the highest beta in your portfolio only comprises 0 .0001 % of the portfolio, right? it can't control your whole portfolio like that, right? and so it's ignorant of position sizing as well.
03:04
That just doesn't make any sense.
03:08
So c is not possible, and that leaves us just with d...