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:

Expiration Date

The date on which an option, futures contract, or insurance policy loses its validity or expires.

Obligated

Required to do something based on legal or moral duties.

Right To Buy

A legal provision giving tenants the opportunity to purchase the home they are renting, often at a discount.

Real Option

A choice made available to managers regarding investment opportunities, considering the flexibility to adapt to market changes.