Asked by Natasha De Freitas on Jul 15, 2024
Verified
Which of the following statements is correct?
A) A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
B) If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.
C) Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.
D) A security's beta measures its nondiversifiable, or market, risk relative to that of an average stock.
Well-Diversified Portfolio
An investment portfolio that spreads risk and opportunity across a wide range of assets and sectors, aiming to reduce the impact of any single investment's poor performance.
Diversifiable Risk
A type of investment risk that can be reduced through diversification, relating to factors affecting specific industries, companies, or securities rather than the market as a whole.
Publicly Traded Stocks
Stocks of companies that are traded on public stock exchanges, making them available to buy and sell by investors.
- Learn to distinguish between the concepts of diversifiable (unsystematic) risk and non-diversifiable (systematic) risk.
Verified Answer
AC
Angelica CalderonJul 20, 2024
Final Answer :
D
Explanation :
Beta is a measure of nondiversifiable or market risk. It measures how a stock's returns move relative to the market returns. Beta has no relation to diversifiable risk or a well-diversified portfolio. It only measures the risk inherent in the overall market.
Learning Objectives
- Learn to distinguish between the concepts of diversifiable (unsystematic) risk and non-diversifiable (systematic) risk.