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Portfolio Beta related question
I’m having trouble understanding how margin affects the risk of a security.
In A Random Walk Down Wall Street, Malkiel says to get a higher average long run rate of return you should increase the beta of your portfolio. A few of his examples confused me. “An investor can get a portfolio with a beta larger than 1 by buying high beta stocks or by purchasing a portfolio with average volatility on margin. One proposed by a West Coast bank would have allowed an investor to buy the S&P average on margin, thus increasing both his risk and potential reward.” What I find confusing From what I understand, margin is buying a security with money borrowed from a broker. When Malkiel writes “purchasing a portfolio with average volatility on margin,” I interpret it to meaning purchasing a portfolio with beta equal to 1 with money that you borrowed. I interpret “One proposed by a West Coast bank would have allowed an investor to buy the S&P average on margin, thus increasing both his risk and potential reward,” to mean an investor would buy the S&P average with money borrowed from a broker and somehow it increases his risk and reward. How do these examples make sense? |
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