Which of the Following Statements Is Most Correct

question 17

Multiple Choice

Which of the following statements is most correct?

• A) If you add enough randomly selected shares to a portfolio, you can completely eliminate all the market risk from the portfolio
• B) If you formed a portfolio which included a large number of low beta shares (shares with betas less than 1.0 but greater than -1.0), the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the shares in the portfolio, so the portfolio would have a relatively low degree of risk.
• C) If you were restricted to investing in publicly traded ordinary shares, yet you wanted to minimise the riskiness of your portfolio as measure by its beta, then, according to the CAPM theory, you should invest some of your money in each share in the market, i.e., if there were 10,000 traded shares in the world, the least risky portfolio would include some shares in each of them.
• D) Company specific (or unsystematic) risk can be eliminated by forming a large portfolio, but normally even highly diversified portfolios are subject to market (or systematic) risk.
• E) Statements b and d are both correct.

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Definitions:

Mutual Agency

A legal principle in partnerships where each partner has the authority to bind the partnership (and other partners) in contracts related to the business's usual operations.

Positive Net Income

A financial situation where a company's total revenues exceed its total expenses, indicating profitability.

Inexpensive to Organize

Refers to the low cost associated with setting up a certain type of business structure or organization.

Personal Assets

Items or properties owned by an individual that have value.