Kim invests in the market, and thus, she is subject to market risks. By diversifying her portfolio, she can minimize price volatility or at least keep the volatility of returns equal to or less than the market in which she invests. She can use statistical measures such as the standard deviation or beta to measure her ability to minimize volatility. If Kim wants her risk to equal that of the market, she should invest in stocks with
A) a beta of 1.0.
B) betas greater than 1.0.
C) betas less than 1.0.
D) a beta of 0.1.
E) betas greater than 0.1.

Question

Quizplus · Accepted Answer

If Kim wants her risk to equal that of the market, she should invest in stocks with a beta of 1.0. Stocks with betas greater than 1.0 have more risk than the market, whereas those with betas of less than 1.0 have less risk than the market. Thus, in a diversified portfolio of common stocks, we can build a portfolio with betas greater than, equal to, or less than 1.0 depending on our risk preference.

Kim Invests in the Market, and Thus, She Is Subject