Which of the following statements is CORRECT?
A) A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks,regardless of how the stocks in the smaller portfolio are selected.
B) Diversifiable risk can be reduced by forming a large portfolio,but normally even highly-diversified portfolios are subject to market (or systematic)risk.
C) A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
D) A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
E) If you add enough randomly selected stocks to a portfolio,you can completely eliminate all of the market risk from the portfolio.

Question

Quizplus · Accepted Answer

This statement is correct because diversifiable risk, also known as unsystematic risk, can be reduced by forming a large portfolio through diversification, but even highly diversified portfolios are still subject to market or systematic risk. This is because systematic risk affects the overall market and cannot be diversified away. Therefore, option A is incorrect because the standard deviation of a portfolio of randomly selected stocks will be lower than that of a portfolio with fewer stocks, but only up to a certain point where further diversification doesn't significantly reduce unsystematic risk. Option C is incorrect because the standard deviation of a large portfolio of randomly selected stocks will be lower than that of a 1-stock portfolio, regardless of the beta of the single stock. Option D is incorrect because a portfolio of stocks with betas greater than 1.0 will have higher market risk than a single stock with a beta of 0.8 because beta measures systematic risk. Option E is incorrect because no matter how many stocks are added to a portfolio, there will always be some level of market risk due to systematic risk.

Which of the Following Statements Is CORRECT