a.       If one of your stocks has a relatively high beta of 1.4 and
is currently doing exceedingly well, why would you want a stock in
your portfolio with a relatively low beta of 0.7 that has been
recently under-performing? By diversifying your investments according
to betas, have you entirely removed the potential risk of losses due
to a declining stock market?
b.       If you are relatively risk adverse, would you require a
higher beta stock to induce you to invest than the beta required by a
person more willing to take risks? Explain

Hi!!

I found a great answer to your question at Term Paper Genie site, I
cannot reproduce it here due copyright restrictions but you can easily
read it here:
"Risk Management"
http://www.termpapergenie.com/risk_management.html


I hope you find the above link useful, and, as always, feel free to
request for a clarification if you need it, I will gladly respond your
requests for further assistance on this question.

Regards.
livioflores-ga

At the risk of stating some obvious points, remember that beta is
simply a measure of how much a stock has varied relative to market
variations in the past. I think of it more as "Is the stock boring or
exciting?" than "is it good or bad?" So the stock with the 1.4 beta is
more likely to do >either< better or worse than the market, because
that's what has happened in the past.

The 0.7 beta should vary less the market does. That does not imply a
positive return in a down market, but a smaller loss. So to your
question "have you entirely removed the potential risk of losses due
to a declining stock market?" the answer is no. Diversity and lower
betas reduce the probable magnitude of decline. A low beta does not
suggest a stock moving opposite to the market; beta is not a good
statistic to use for that.
 
Beta is not magic. It is a statistical tool that summarizes a stock's
history. It does not say much about whether a stock is a good value
idea, or if it has strong momentum, or if the company is falling
apart. It is more useful for evaluating a portfolio than for picking
individual stocks. To your question b, if you want the lowest risk,
i.e. to have fewest surprises -- good or bad -- relative to the
market, you should put more lower beta stocks in your portfolio.