Which of the following statements is CORRECT?
A) If you add enough randomly selected stocks to a portfolio,you can completely eliminate all of the market risk from the portfolio.
B) 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 an equal amount of money in each stock in the market.That is,if there were 10,000 traded stocks in the world,the least risky possible portfolio would include some shares of each one.
C) If you formed a portfolio that consisted of all stocks with betas less than 1.0,which is about half of all stocks,the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio,and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.
D) Market risk can be eliminated by forming a large portfolio,and if some Treasury bonds are held in the portfolio,the portfolio can be made to be completely riskless.
E) A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.

Question

Quizplus · Accepted Answer

The statement that a portfolio consisting of all stocks with betas less than 1.0 would have less risk than a portfolio consisting of all stocks in the market is correct. This is because stocks with betas less than 1.0 are less volatile than the overall market, so a portfolio consisting only of these stocks would have less market risk. The statement in choice A is incorrect because there is always some degree of market risk that cannot be eliminated through diversification. The statement in choice B is incorrect because the CAPM theory states that the least risky portfolio is the one with the lowest beta, not one that invests equally in all stocks. The statements in choices D and E are incorrect because market risk cannot be completely eliminated, and a portfolio consisting of all stocks in the market would have a required return that is higher than the riskless rate due to the inclusion of market risk.

Which of the Following Statements Is CORRECT