True, False or Uncertain? Explain. Systematic risk can be virtually eliminated b
ID: 2721833 • Letter: T
Question
True, False or Uncertain? Explain. Systematic risk can be virtually eliminated by holding a portfolio of a large number of stocks. b.You are a risk-averse investor who is considering investing in one of two economics. The expected return and volatility of all stocks in both economics is the same. In the first economy, all stocks move together - in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns arc independent - one stock increasing in price has no effect on the prices of other stocks. Which economy would you choose to invest in? Explain. c.A financial advisor tells a risk averse investor that he/she should not add any stocks of gold producers to his/her portfolio because the stock prices of these stocks are highly variable (that is, they have high standard deviations). Is this good advice? Why or why not?Explanation / Answer
(a)Systematic risk are Non Diversifiable risk hence it can not be eliminated by diversifcation. Hence the answer is false.
(b) As a risk averse investor i should invest in a portfolio that has diversificaiton. As in First Economy all the stocks moves in the same direction there is no diversification involved where as the return of Individual stocks in the second portfolio are independent of each other's return hence the as a risk averse investor i should consider invstment in second economy.
(c) It is not a good advise. As a risk averse investor your portfolio should be diversified and include all types of stock which makes your portfolio diversified. You should also include some higher Beta stock also to diversify your portfolio.
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