Mr Ali recently met with one of his clients. Mr Ali invests in a list of 30 stocks drawn from several industries. At the
Posted: Sun Jul 03, 2022 12:52 pm
Mr Ali recently met with one of his clients. Mr Ali invests in alist of 30 stocks drawn from several industries. At the meeting,his client made the following comment: “I trust your stock pickingability, but why invest in 30 stocks when you have strong opinionsonly on few of them?” Mr Ali plans to response to his client withinthe context of modern portfolio theory.(a) Explain the concepts of systematic risk and firm-specific risk,and give an example of each type of risk.(b) Comment on the client’s statement. Discuss how both systematicand firm-specific risk change as the number of securities in aportfolio is increased.