d. If you added more stocks at random to the portfolio, which of the following is the most accurate statement of what would happen to σp?

(1) σp would remain constant.

(2) σp would decline to somewhere in the vicinity of 20%.

(3) σp would decline to zero if enough stocks were included.

Year –rA

–r B

2006 −18% −24%

2007 44 24 2008 −22 −4 2009 22 8 2010 34 56 Chapter 6: Risk, Return, and the Capital Asset Pricing Model 257

(ST–2)

Beta and Required Rate of Return