Which one of the following statements is correct concerning a portfolio which consists of a risk-free asset and four stocks with individual betas of 1.1, 1.4, 1.5, and 1.8?
A) The beta of the portfolio must be greater than 1.0.
B) The expected return on the portfolio is equal to the market rate of return.
C) The portfolio can have more than, less than, or the same amount of systematic risk as the market.
D) A portfolio comprised of these ﬁve securities will eliminate all of the diversiﬁable risk.
E) The risk of the portfolio must be less than the market level of risk.

Question

Quizplus · Accepted Answer

The beta of the portfolio is determined by the weights allocated to each asset. Therefore, it could be greater or less than 1.0 depending on the allocation. The expected return on the portfolio is a weighted average of the expected returns of each asset, so it is not necessarily equal to the market rate of return. The portfolio will still have some diversifiable risk, as it is not fully diversified by holding only four stocks. Therefore, D is incorrect. The risk of the portfolio will depend on the allocation of assets and cannot be determined solely based on the betas of the individual assets. Therefore, E is also incorrect.

Which One of the Following Statements Is Correct Concerning a Portfolio