Your eccentric uncle died and left you $100,000. However, the will stipulated th

Question

Your eccentric uncle died and left you $100,000. However, the will stipulated that the entire amount must be invested in common stocks. Specifically, $50,000 must be invested in a single stock (a one-stock portfolio) and the other $50,000 must be invested in a 100-stock portfolio. You are very risk averse, so you want to minimize the riskiness of each $50,000 investment.
a. Describe the kind of stock you would choose for your single-stock portfolio?
b. What types of stock would you choose the stocks for your 100-stock portfolio?
c. From a practical standpoint, how should you view the riskiness of your single-stock portfolio?

Explanation / Answer

1) The stock whose beta is lower as lower beta means lower market risk 2) I will choose that portfolio whose stocks have a correlation coefficient of 1 for lower risk 3) Single stock portfolio will always have more risk than 100 stock portfolio, due to diversifiable risk which is not there in a portfolio Regards Anup

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