Question

Which of the following statements is CORRECT?

a.   A stock with a beta of -1.0 has no risk if it is in a 1-stock portfolio.
b.   By definition, all stocks in the market have the same level of market risk.
c.   Portfolio diversification reduces the variability of returns on an individual stock.
d.   If you diversify completely and hold all the stocks in the market, your portfolio will have a standard deviation equal to zero.
e.   The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.

Answer 1

e. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.

Option A is incorrect because in a 1-stock portfolio, relevant risk is measured by standard deviation and not by beta

Option B is incorrect because all stocks have different beta and hence different market risk

Option C is incorrect because it reduces the variability on the portfolio and not on an individual stock

Option D is incorrect because risk has not been completely eliminated