Assume That Two Investors Each Hold a Portfolio, and That

question 39

True/False

Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of MINUS 2.0, while Investor B's portfolio has a beta of PLUS 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

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Definitions:

Positive Slope

Represents a line or curve on a graph that depicts an increase in value as one moves from left to right, signifying a direct relationship between two variables.

Market Risk

The risk of losses in investments due to market-wide phenomena, such as economic downturns or changes in interest rates.

Relevant Risk

The portion of an investment's risk that cannot be eliminated through diversification, related to factors affecting the market as a whole.

Hurdle Rate

The minimum rate of return on an investment that is required by a manager or investor to proceed with the investment.