Asked by Gisell Dominguez Monreal on Jul 22, 2024
Verified
Which one of the following statements concerning beta is correct?
A) The beta of a portfolio must be greater than or equal to zero but less than or equal to one.
B) The beta of a portfolio can be greater than the highest beta of an individual security within the portfolio.
C) If the weights of the individual securities within a portfolio are changed, the beta of the portfolio will remain constant.
D) The beta of a portfolio measures the systematic risk of the portfolio and has a value that cannot exceed the value of the highest beta of any individual security in the portfolio.
E) The beta of a portfolio measures the unsystematic risk of the portfolio and has a value that must be greater than or equal to zero.
Portfolio Beta
A measure of the volatility of a portfolio relative to the overall market; the aggregate beta of all the investments in the portfolio.
Systematic Risk
The inherent risk associated with the entire market or market segment, undiversifiable through portfolio diversification.
Unsystematic Risk
The risk associated with a specific company or industry, which can be mitigated through diversification of an investment portfolio.
- Understand the principle of beta in assessing systematic risk and its influence on anticipated returns.
Verified Answer
JS
Jihad SamadJul 27, 2024
Final Answer :
D
Explanation :
The beta of a portfolio measures the systematic risk of the portfolio relative to the market as a whole. It can indeed be less than, equal to, or greater than the beta of any individual security within the portfolio, depending on the weights and betas of the individual securities. However, it does not measure unsystematic risk, and there is no inherent rule that it cannot exceed the highest individual security's beta within the portfolio, making D the correct choice.
Learning Objectives
- Understand the principle of beta in assessing systematic risk and its influence on anticipated returns.