Asked by Surinder Gujral on May 12, 2024
Verified
Which one of the following statements is correct concerning a portfolio which consists of a risk-free asset and four stocks with individual betas of 1.1, 1.4, 1.5, and 1.8?
A) The beta of the portfolio must be greater than 1.0.
B) The expected return on the portfolio is equal to the market rate of return.
C) The portfolio can have more than, less than, or the same amount of systematic risk as the market.
D) A portfolio comprised of these five securities will eliminate all of the diversifiable risk.
E) The risk of the portfolio must be less than the market level of risk.
Risk-free Asset
An investment that is expected to return its original investment without any loss and with a certain rate of return. Typically, government bonds are considered close to risk-free.
Beta
Beta is a measure of a stock's volatility in relation to the overall market, indicating the stock's risk compared to the market risk.
Systematic Risk
The risk inherent to the entire market or market segment, representing factors that affect all companies such as economic, political, or social changes.
- Master the concept of beta as a key measure of systematic risk in investment portfolios.
- Grasp the methodology for calculating expected portfolio returns and variances.
Verified Answer
LH
Linda HarrisMay 13, 2024
Final Answer :
C
Explanation :
The beta of a portfolio is a weighted average of the betas of its components. Since the betas of the stocks range from 1.1 to 1.8 and include a risk-free asset (which has a beta of 0), the portfolio's beta can be adjusted through weighting to be more than, less than, or equal to 1 (the market beta), indicating it can have more, less, or the same amount of systematic risk as the market.
Learning Objectives
- Master the concept of beta as a key measure of systematic risk in investment portfolios.
- Grasp the methodology for calculating expected portfolio returns and variances.