“If an investor holds shares of about 20 different businesses all of the risk is eliminated...

“If an investor holds shares of about 20 different businesses all of the risk is eliminated and the portfolio will give a return equal to the risk-free rate.” Discuss the statement. (Write minimum 1,000 words and prove proper referencing).

Expert Solution

Generally when a person or investor holds shares of different companies it amounts to portfolio. The portfolios risk consits of systematic risk and unsystematic risk. If an investor invests in different securities in well diversified portfolio he can eliminate only unsystematic risk. However the systematic risk cannot be eliminated. As a result, an investor who holds a well-diversified portfolio will only require a return for systematic risk..

Systematic risk remains present in all portfolios. Some investments will be more sensitive to market factors than others and will therefore have a higher systematic risk. Investors investing in different securities will find it the risk affecting the portfolio is always systematic.unsystematic risk has been diversified away. These investors may want to measure the systematic risk of each individual investment within their portfolio, or of a potential new investment to be added to the portfolio. A single investment is affected by both systematic and unsystematic risk but if an investor owns a well-diversified portfolio then only the systematic risk of that investment would be relevant.

jeff jeffy answered 2 years ago

If an investor holds shares of about 20 different businesses all of the risk is eliminated...

If an investor holds shares of about 20 different businesses all of the risk is eliminated and the portfolio will give a return equal to the risk-free rate. Discuss the statement. (Write minimum 1,000 words)

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