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)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

Jane's portfolio has more stocks, making it more diversified and therefore less likely to have diversifiable risk. However, both portfolios are subject to similar levels of market risk, as they both hold stocks that are subject to the same market factors. 
Therefore, the required and expected returns on both portfolios should be similar. Dick's portfolio, on the other hand, will have more diversifiable risk because it only has two stocks, which will cause more volatility in the portfolio's returns.

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