If you randomly select stocks and add them to your portfolio, which of the follo

Question

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.

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.

Explanation / Answer

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

When we are selecting the stocks randomly (i.e. no corelation between different stocks ) than we are reducing our beta coefficient which is a measure of systematic risk and thus reducing the systematic risk as well.

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