Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

1. True

2. False

Question

Erica Roach

Business

27 September, 15:50

Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

1. True

2. False

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Answers (1)

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May · Answer 1

1. True

Explanation:

Both investors' portfolios are equally risky (they are both twice as risky as the market). If any of them invests in stocks with a beta = 1 (market beta), then their portfolio's risk would reduce since the total beta would move towards the market risk. For both of them, the more stocks with beta = 1 that they add to their portfolio's, the more the portfolio's risk will reduce.