The beta of a diversified portfolio will approach 1.0 as the number of stocks increases. Group of answer choices True False

The variance for Steady Corp’s stock is 3.6%; the variance for Techie Corp’s stock is 14.4%. What’s the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocks’ returns is 0?

How would your answer to the last question change if the correlation coefficient increases?

Reading about portfolio composition and the importance of putting together a diversified portfolio, risk aversion, risk diversification, etc. However, the book states that simply putting together stocks with high correlation, regardless of number of stocks, will not achieve desired diversification, because you would still be exposed to similar industry risk, despite owning companies that are not similar at all.

The question is, Is this assumption correct when it comes to creating a portfolio with companies in the same industry, such as the financial industry? Can you achieve a diversified portfolio by holding companies in the same industry, the financial industry? Why or Why not?

2. Which of the following statements is most likely FALSE:

1. Increasing the number of stocks in a portfolio from 10 to 20will decrease total risk

2. Increasing the number of stocks in a portfolio from 10 to 20will decrease non-systematic

3. Decreasing the number of stocks in a portfolio from 20 to 10will increase non-systematic risk

4. Decreasing the number of stocks in a portfolio from 20 to 10will increase total risk

5. Decreasing the number of stocks in a portfolio from 20 to 10will increase systematic risk