Which of the following statements is most correct?
A) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio.
B) If you formed a portfolio which included a large number of low beta stocks (stocks with betas less than 1.0 but greater than -1.0), the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, so the portfolio would have a relatively low degree of risk.
C) If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then, according to the CAPM theory, you should invest some of your money in each stock in the market, i.e., if there were 10,000 traded stocks in the world, the least risky portfolio would include some shares in each of them.
D) Diversifiable risk can be eliminated by forming a large portfolio, but normally even highly diversified portfolios are subject to market risk.
E) Statements b and d are correct.

Question

Quizplus · Accepted Answer

Statement B is correct because the portfolio beta is the weighted average of the individual betas, leading to a lower risk if low beta stocks are included. Statement D is correct because diversifiable risk can be eliminated, but market risk remains.

Which of the Following Statements Is Most Correct