Which of the Following Statements Is Most Correct

question 14

Multiple Choice

Which of the following statements is most correct?

• A) Portfolio diversification reduces the variability of the returns on the individual stocks held in the portfolio.
• B) If an investor buys enough stocks, he or she can, through diversification, eliminate virtually all of the non¬market (or company-specific) risk inherent in owning stocks. Indeed, if the portfolio contained all publicly traded stocks, it would be riskless.
• C) The required return on a firm's common stock is determined by its systematic (or market) risk. If the systematic risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return.
• D) A security's beta measures its nondiversifiable (systematic, or market) risk relative to that of an average stock.
• E) A stock's beta is less relevant as a measure of risk to an investor with a well diversified portfolio than to an investor who holds only that one stock.

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Definitions:

Return on Total Assets

A financial ratio that measures the profitability of a company relative to its total assets, indicating how efficiently a company uses its assets to generate profits.

Profit Margin

A financial metric used to assess a company's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold.

Total Asset Turnover

A financial metric that measures a company's efficiency in using its assets to generate sales or revenue.

Net Income

The total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue; often referred to as the bottom line.