Suppose You Held a Well-Diversified Portfolio with a Very Large $\sigma$

question 40

Multiple Choice

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds.If the $\sigma$ of your portfolio was 0.18 and $\sigma$ _M was 0.22, the $\beta$ of the portfolio would be approximately

• A)0.64.
• B)1.19.
• C)0.82.
• D)1.56.

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Definitions:

Conventional Thinking

A mode of thought based on accepted norms and standards, often contrasted with creative or critical thinking approaches.

Transitivity

A principle in logic and mathematics stating that if a relation holds between a first and a second element, and also between the second and a third, it must necessarily hold between the first and the third.

Conservation

The act of preserving, protecting, or restoring the natural environment and wildlife.

Class Inclusion

Class inclusion is a cognitive ability to understand that a specific item can belong to a broader category as well as to a more specific subcategory at the same time, a concept extensively studied by Jean Piaget.