Which of the Following Statements Is Most Correct

question 65

Multiple Choice

Which of the following statements is most correct?

• A) If you add enough randomly selected stocks 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 stocks (stocks 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 stocks in the portfolio,so the portfolio would have a relatively low degree of risk.
• C) If you were restricted to investing in publicly traded common stocks,yet you wanted to minimize the riskiness of your portfolio as measured by its beta,then,according to the CAPM theory,you should invest some of your money in each stock in the market,i.e. ,if there were 10,000 traded stocks 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:

Income Tax Advantage

Refers to financial strategies or decisions made to minimize tax liabilities and maximize after-tax income.

Leverage

Utilizing borrowed funds to increase the potential return on investment, which can also amplify the potential for loss.

Interest Payments

Money paid by a borrower to a lender for the use of borrowed funds, typically calculated as a percentage of the principal sum.

Rate of Return

The profit or deficit accrued from an investment during a certain timeframe, depicted as a percentage of the investment's original value.