Jane has a portfolio of 20 average stocks,and Dick has a portfolio of 2 average stocks.Assuming the market is in equilibrium,which of the following statements is CORRECT?
A) Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
B) The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
C) Dick's portfolio will have more diversifiable risk,the same market risk,and thus more total risk than Jane's portfolio,but the required (and expected)returns will be the same on both portfolios.
D) If the two portfolios have the same beta,their required returns will be the same,but Jane's portfolio will have less market risk than Dick's.
E) The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.

Question

Quizplus · Accepted Answer

C) Dick's portfolio, being less diversified with only 2 stocks, will have more diversifiable risk compared to Jane's more diversified portfolio of 20 stocks. However, both portfolios will have the same market risk since market risk is undiversifiable and affects all stocks similarly. The required returns on both portfolios will be the same if they have the same beta, as the Capital Asset Pricing Model (CAPM) suggests that required return is based on the market risk (beta) rather than diversifiable risk.

Jane Has a Portfolio of 20 Average Stocks,and Dick Has