Jane holds a large diversified portfolio of 100 randomly selected stocks and the portfolio's beta = 1.2. Each of the individual stocks in her portfolio has a standard deviation of 20 percent. Jack has the same amount of money invested in a single stock with a beta equal to 1.6 and a standard deviation of 20 percent. Which of the following statements is most correct?
A) Jane's portfolio has a larger amount of company-specific risk since she is holding more stocks in her portfolio.
B) Jane has a higher required rate of return, since she is more diversified.
C) Jane's portfolio has less market risk since it has a lower beta.
D) Statements b and c are correct.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

Jane's portfolio has a lower beta than Jack's single stock investment, indicating that it has less systematic or market risk. This is because beta measures the sensitivity of a security's returns to market movements. However, Jane's portfolio may have more company-specific risk due to holding a larger number of stocks that are each subject to their own risks and uncertainties. Statement b is not necessarily correct since Jane's higher level of diversification may actually reduce her required rate of return, but this is not directly related to the given information about the beta and standard deviation of her portfolio.

Jane Holds a Large Diversified Portfolio of 100 Randomly Selected