James Martindale, CFA, manages a small mutual fund specializing in defensive equity investments. Martindale has purchased 10,000 shares of BLM stock for the portfolio after deciding that the stock would contribute to meeting the fund's objectives. Which of the following characteristics would make BLM stock suitable for
Martindale's mutual fund?
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A. B. C.B
To determine whether BLM stock is suitable for James Martindale's mutual fund, let's analyze each characteristic mentioned in the answer choices:
A. A high beta: Beta measures the sensitivity of a stock's returns to the overall market returns. A high beta implies that the stock is more volatile and tends to move more in line with the market. In the case of a defensive equity fund, which aims to provide stability and downside protection, a high beta stock may not be suitable. Such a stock's price movements are likely to be more correlated with the market, which could result in increased volatility and potential losses during market downturns. Therefore, a high beta is not a desirable characteristic for Martindale's mutual fund.
B. Low systematic risk: Systematic risk refers to the risk that cannot be diversified away by holding a well-diversified portfolio. It is related to factors affecting the overall market, such as economic conditions, interest rates, or political events. A defensive equity fund aims to minimize systematic risk and focus on stocks that provide stability and downside protection. Therefore, low systematic risk would be a desirable characteristic for BLM stock to be suitable for Martindale's mutual fund.
C. Higher rate of return than other stocks with similar risk characteristics: This characteristic refers to the stock's ability to generate a higher rate of return relative to other stocks that have similar risk profiles. In the context of a mutual fund, which aims to generate returns for its investors, a higher rate of return is generally desirable. However, it is essential to consider whether the higher rate of return is achievable due to increased risk or if it can be attributed to other factors such as superior management, competitive advantage, or strong financial performance. Without further information, it is challenging to determine whether this characteristic alone makes BLM stock suitable for Martindale's mutual fund.
Based on the analysis, the characteristic that would make BLM stock suitable for Martindale's mutual fund is option B: Low systematic risk. Defensive equity funds prioritize stability and downside protection, and a stock with low systematic risk aligns with these objectives. However, additional information would be necessary to fully evaluate the suitability of BLM stock, particularly in terms of its risk-adjusted return and other relevant factors.