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.

Question

Quizplus · Accepted Answer

C) Dick's portfolio, being smaller, will have more diversifiable risk due to less diversification. However, market risk, which is non-diversifiable, remains the same for both portfolios assuming they are invested in the market. The expected returns would be the same if they have the same market risk (beta).

Jane Has a Portfolio of 20 Average Stocks, and Dick