Answer on Finance Question for Joel Smith
(Points : 5)
If you formed a portfolio that included a large number of low-beta stocks (stocks with betas less than 1.0 but greater than -1.0), the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, so the portfolio would have less risk than a portfolio that consisted of all stocks in the market.
If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio.
If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky portfolio would include some shares in each of them.
Market risk can be eliminated by forming a large portfolio, and if some bonds are held in the portfolio, the portfolio can be made to be completely riskless.
A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.
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