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Risk Management: diversify by betas; can a portfolio be risk free?

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Please assist with the following:

1. If one of your stocks has a relatively high beta of 1.4 and is currently doing exceedingly well, why would you want a stock in your portfolio with a relatively low beta of 0.7 that has been recently under-performing? By diversifying your investments according to betas, have you entirely removed the potential risk of losses due to a declining stock market?

2. If you are relatively risk adverse, would you require a higher beta stock to induce you to invest than the beta required by a person more willing to take risks? Explain. From the investment instruments in the simulation, is it possible to construct a portfolio that is risk free? Explain.

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The 374 word solution explains about risk and beta in response to the questions below.

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1. If one of your stocks has a relatively high beta of 1.4 and is currently doing exceedingly well, why

would you want a stock in your portfolio with a relatively low beta of 0.7 that has been recently

under-performing? By diversifying your investments according to betas, have you entirely removed the

potential risk of losses due to a declining stock market?

First, let's take a look at the risk composition of the portfolios:

Total Risk = Systematic risk + non-Systematic risk

The Systematic risk is the risk intrinsic to the stock market, such as business cycle, ...

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