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

Question

Quizplus · Accepted Answer

The beta of a portfolio is calculated as the weighted average of the betas of the individual stocks in the portfolio. Therefore, the beta of the portfolio is equal to the weighted average of the betas of the individual stocks. Option A is incorrect because diversification reduces risk. Option B is incorrect because the portfolio risk is influenced by the correlation among the stocks. Option C is incorrect because the beta of a portfolio is not expected to be less than the weighted average of the betas of the individual stocks. Option E is incorrect because the beta of a portfolio is not expected to be larger than the weighted average of the betas of the individual stocks.

For a Portfolio of 40 Randomly Selected Stocks,which of the Following