Question

Portfolio A is a well-diversified portfolio that is equally weighted among 5,000 different and diverse stocks. Portfolio A has an average amount of systematic risk, so it has exactly the same amount of systematic risk as the market portfolio Portfolio B consists of 2 stocks that operate in the restaurant industry: 500 shares of Gourmet Restaurant in stock, which has a price of $26 per share and a beta of 0.6; and 1,000 shares of Suppertime Restaurant Inc. stock, which has a price of $22 per share and a beta of 1.4. All stocks have some unsystematic risk and all stocks have the same level of unsystematic risk. Which one of the following assertions is most likely to be true?

a. Portfolio A has less systematic risk than portfolio B, and portfolio A and less unsystematic risk than portfolio B
b. Portfolio A has less systematic risk than portfolio B, and portfolio A and more unsystematic risk than portfolio B
c. Portfolio A has more systematic risk than portfolio B, and portfolio A and less unsystematic risk than portfolio B
d. Portfolio A has more systematic risk than portfolio B, and portfolio A and more unsystematic risk than portfolio B

Answer 1

A

Step-by-step explanation:

Systemic risk are risk that are inherent in the economy. They cannot be diversified away. They are also known as market risk. examples of this risk include recession, inflation, and high interest rates. Investors should seek compensation for systemic risk. Systemic risk is measured by beta. The higher beta is, the higher the systemic risk and the higher the compensation demanded for by investors

the systemic risk of portfolio A = 1

systemic risk of portfolio B = (proportion of Gourmet Restaurant's stock x beta of Gourmet Restaurant's stock) + (proportion of Suppertime Restaurant's stock x beta of Suppertime Restaurant's stock)

(
`(500)/(1500)` × 0.6) + (
`(1000)/(1500)` × 1.4) = 0.2 + 0.9 = 1.1

Portfolio B has a higher beta and thus a higher systemic risk than Portfolio A

Non systemic risk are risks that can be diversified away. they are also called company specific risk. Examples of this type of risk is a manager engaging in fraudulent activities.

Portfolio A is more diversified than portfolio B. Thus, Portfolio B has a higher non-systemic risk