VCM012225

Which of the following statements is CORRECT?

• Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.

• A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.

• A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.

• If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.

• A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

• The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.

• The beta of the portfolio is less than the average of the betas of the individual stocks.

• The beta of the portfolio is equal to the average of the betas of the individual stocks.

• The beta of the portfolio is larger than the average of the betas of the individual stocks.

• The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

• The expected return of your portfolio is likely to decline.

• The diversifiable risk will remain the same, but the market risk will likely decline.

• Both the diversifiable risk and the market risk of your portfolio are likely to decline.

• The total risk of your portfolio should decline, The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.and as a result, the expected rate of return on the portfolio should also decline.

• The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.

Which of the following statements is CORRECT?

• The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.

• An investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks.

• Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.

• An investor can eliminate almost all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

• An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.

If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?

• Adding more such stocks will increase the portfolio's expected rate of return.

• Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.

• Adding more such stocks will have no effect on the portfolio's risk.

• Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.

• Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.