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11 Dec 2018

Which portfolio has the least unsystematic risk and why?

a) 500 Energy stocks
b) 50 stocks (5 each from ten different sectors)
c) 500 gold bars

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Beverley Smith
Beverley SmithLv2
13 Dec 2018

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Related questions

Can we have high-beta stocks that might be attractive from a risk perspective and low-beta stocks that are unattractive? Explain.

In broad terms, why is some risk diversifiable? Why are some risks non diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

QUESTION 5

Today is your 25th birthday, and you want to save $1.5 Million by your birthday at age 70. If you expect to earn 7% APR compounded monthly in your retirement account, what constant payment at the end of each month must you deposit into the account through your 70th birthday in order to reach your retirement savings goal on your 70th birthday? (Answer to the nearest penny.)

QUESTION 46

Suppose you are comparing two portfolios of stocks to determine which is more appropriate for all of your investments. Portfolio A contains a large number of stocks, but each stock appears to have a relatively high amount of risk which you believe is unsystematic in nature and a relatively low level of systematic risk. Portfolio B also contains a large number of stocks, however each stock in that portfolio seems to contain a relatively large amount of systematic risk and a low level of unsystematic risk. If both portfolios have the same expected return, which portfolio would most likely be the best choice?

a.

Portfolio A
b.

Portfolio B
c.

There is no information that would indicate that one portfolio is better than the other.

Q2: You own a portfolio that has $700 invested in Stock A and $2,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 18 percent, respectively. 
 
Required:  
 
a) What is the expected return on the portfolio?
b) Why is some risk diversifiable? Why are some risks non-diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? 
c) Can the risk of a portfolio be reduced to zero by increasing the number of stocks in the portfolio? Explain.
d) If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.

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