#1
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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? |
#2
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Re: Portfolio Beta related question
Leverage increases volatility, i.e. beta.
Malkiel also said in my copy of Random Walk (page 234, copyright 2003) said that studies show no relation between beta and returns. |
#3
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Re: Portfolio Beta related question
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Leverage increases volatility, i.e. beta. [/ QUOTE ] I don't understand this. If you could explain this in terms even I can understand I'd greatly appreciate it. Thanks |
#4
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Re: Portfolio Beta related question
If you buy a hundred bucks worth of stock and it goes up 10% you make ten bucks. If you buy two hundred bucks worth of stock (borrowing a hundred bucks) and it goes up 10% you make twenty bucks.
Don't forget the 8% margin interest you have to pay on the loan. Oh, and on the years the market goes down, you still pay the margin interest. |
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