Which of the following statements is CORRECT? A portfolio with a large number of
ID: 2719040 • Letter: W
Question
Which of the following statements is CORRECT?
A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.
A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
If a stock has a negative beta, its expected return must be negative.
According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
A.A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
B.If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.
C.A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
D.If a stock has a negative beta, its expected return must be negative.
E.According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
Explanation / Answer
Answer C. A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
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