Which of the Following Statements Is CORRECT

question 86

Multiple Choice

Which of the following statements is CORRECT?

• A) If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks.Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.
• B) The required return on a firm's common stock is, in theory, determined solely by its market risk.If the market 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.
• C) Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.
• D) A security's beta measures its non-diversifiable, 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:

Perfectly Competitive

A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price-taking behavior.

Optimal Output Rule

The principle that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

Marginal Revenue

The additional income earned by a company from selling one more unit of a good or service, reflecting the benefit of increased production.

Marginal Cost

The boost in expense for crafting one more unit of a product or service.