Question

You have been offered an opportunity to invest in one of the two fully diversified portfolios, Portfolio H and Portfolio L. While you know that the betas of these portfolios are identical, you only know that, on average, the stocks held in Portfolio H have a higher level of specific risk than those in Portfolio L. From what you know about the capital asset pricing model (CAPM), which portfolio should you invest in? Which portfolio should give you a higher expected return?



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  • CreatedDecember 17, 2014
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