Portfolio theory can be dangerous to a small investor because:
A)he or she doesn't have much money to lose.
B)beta, the theoretical measure of risk, ignores business-specific risk, which is significant to an investor who doesn't have a large enough portfolio to diversify it away.
C)it makes investing seem more scientific than it really is.
D)the stock market is very unforgiving.

Question

Quizplus · Accepted Answer

Portfolio theory emphasizes the importance of diversification, but small investors may not have a large enough portfolio to diversify away the risks associated with investing in individual companies. Beta, the measure of a stock's volatility relative to the overall market, may not capture the unique risks of individual companies (such as management or industry-specific risks) that could cause a significant loss for a small investor. Therefore, relying solely on portfolio theory could be dangerous for a small investor.

Portfolio Theory Can Be Dangerous to a Small Investor Because