Gregory is a conservative investor who wants to hold a portfolio of equity securities that would fall less than the overall market in a downturn. Which of the following portfolios would you advise Gregory to invest in?

Beta is a measure of a portfolio's volatility, or systematic risk, in comparison to the market as a whole. A beta of 1 implies the portfolio will move in line with the market. A beta greater than 1 indicates higher volatility, meaning it would fall more than the market in a downturn. A beta less than 1 signifies lower volatility. For a conservative investor wanting to mitigate losses during a market decline, a portfolio with a beta less than 1 is the most suitable choice as it is expected to fall by a smaller percentage than the overall market.

A. A portfolio with a beta equal to 1 would fall approximately in line with the overall market, not less.
B. A portfolio with a beta between 1 and 2 is more volatile than the market and would fall more in a downturn.
C. A portfolio with a beta greater than 2 is significantly more volatile and would experience much larger losses than the market.

1. Bodie, Z., Kane, A., & Marcus, A. J. (2021). Investments (12th ed.). McGraw-Hill Irwin. Chapter 9, "The Capital Asset Pricing Model," defines beta as a measure of systematic risk and explains its implications for portfolio volatility relative to the market.

2. Damodaran, A. (n.d.). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New York University, Stern School of Business. Chapter 4, "The Basics of Risk," explains that lower beta stocks are less sensitive to market movements.