Which of the following is most likely to be true for a portfolio of 40 randomly selected stocksσ
A) the riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B) the beta of the portfolio is less than the average of the betas of the individual stocks.
C) the beta of the portfolio is equal to the average of the betas of the individual stocks.
D) the beta of the portfolio is larger than the average of the betas of the individual stocks.
E) the riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

Question

Quizplus · Accepted Answer

The beta of the portfolio is the weighted average of the individual stock betas, where the weights are the proportion of the portfolio invested in each stock. Since the portfolio is randomly selected, the betas of the individual stocks will be distributed around the market beta of 1.0. Therefore, the average of the individual stock betas will also be close to 1.0. As a result, the beta of the portfolio is likely to be close to the average of the individual stock betas, which is 1.0. Therefore, choice C is the most likely to be true.

Which of the Following Is Most Likely to Be True