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Finance and Market Risk questions (random stocks, low beta stocks, publicly traded stocks and diversified portfolios)

Most correct Statement.

1. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio

2. If you formed a portfolio which included a large number of low beta stocks (less than 1.0 but greater than -1.0), the portfolio would itself have a beta coefficient that is = to the weighted average beta of the stocks in the portfolio, so the portfolio would have a relatively low degree of risk.

3. 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 10K traded stocks in the world, the least risky portfolio would include some shares in each of them.

4. Company-specific (or unsystematic) risk can be eliminated by forming a large portfolio but normally even highly diversified portfolios are subject to marked or systematic risk.

5. #2 and # 4 are correct.

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Solution Preview

The answer is #5.

#1 is incorrect because you can only eliminate non-market (company specific risks) by ...

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