Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?
A) The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B) The beta of the portfolio is less than the average of the betas of the individual stocks.
C) The beta of the portfolio is equal to the average of the betas of the individual stocks.
D) The beta of the portfolio is larger than the average of the betas of the individual stocks.
E) The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

Question

Quizplus · Accepted Answer

The beta of a portfolio is a weighted average of the betas of the individual stocks in the portfolio. Therefore, the beta of the portfolio is likely to be equal to the average of the betas of the individual stocks. Option A is incorrect because the riskiness of a portfolio is typically lower than the riskiness of each individual stock due to diversification. Option B and D may or may not be true depending on the specific stocks in the portfolio and their respective betas. Option E is incorrect for the same reason as option A.

Which of the Following Is Most Likely to Be True