Suppose an individual investor starts with a portfolio that consists of one randomly selected stock.
a. What will happen to the portfolio’s risk if more and more randomly selected stocks are added?
b. What are the implications for investors? Do portfolio effects have an impact on the way investors should think about the riskiness of individual securities?
c. Explain the differences between stand-alone risk, diversifiable risk, and portfolio risk.
d. Suppose that you choose to hold a single stock investment in isolation. Should you expect to be compensated for all of the risk that you assume?