FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com | Page 62

in the portfolio, and that portfolio would have less risk than a portfolio
that consisted of all stocks in the market.
d. Market risk can be eliminated by forming a large portfolio, and if
some Treasury bonds are held in the portfolio, the portfolio can be made
to be completely riskless.
e. A portfolio that consists of all stocks in the market would have a
required return that is equal to the riskless rate.
2. Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2
average stocks. Assuming the market is in equilibrium, which of the
following statements is CORRECT?
a. Jane's portfolio will have less diversifiable risk and also less market
risk than Dick's portfolio.
b. The required return on Jane's portfolio will be lower than that on
Dick's portfolio because Jane's portfolio will have less total risk.
c. Dick's portfolio will have more diversifiable risk, the same market
risk, and thus more total risk than Jane's portfolio, but the required (and
expected) returns will be the same on both portfolios.
d. If the two portfolios have the same beta, their required returns will be
the same, but Jane's portfolio will have less market risk than Dick's.
e. The expected return on Jane's portfolio must be lower than the
expected return on Dick's portfolio because Jane is more diversified.
3. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard
deviation of each stock's returns is 20%. The stocks' returns are
independent of each other, i.e., the correlation coefficient, r, between