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Economic systems
04.07.2022 - 20:48

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 r

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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.

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Answers (1)
  • Veola
    April 4, 2023 в 18:21
    The best choice would likely be portfolio A. While each stock in portfolio A has a high level of unsystematic risk (i.e., risk specific to that particular company), the overall portfolio is diversified with a large number of stocks. This means that the unsystematic risks are likely to be mitigated by the presence of other stocks in the portfolio. On the other hand, portfolio B has a high level of systematic risk (i.e., risk that affects the entire market or industry) which is harder to diversify away. Therefore, portfolio A is the better choice as it has similar expected returns, but with lower systematic risk.
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