Table 1 Estimated Total Returns
State of the Economy	Probability	T-Bond	SETX	Golden	S&P 500
Recession	5%	5%	-19%	20%	-14%
Below Average	15%	5%	2%	13%	3%
Average	45%	5%	9%	10%	11%
Above Average	25%	5%	34%	5%	22%
Boom	10%	5%	25%	-5%	33%

Suppose an investor starts with a portfolio consisting of one randomly selected stock.

a. What would happen to the portfolio's risk if more and more randomly selected stocks were added?

b. What are the implications for investors? Do portfolio effects impact the way investors should think about the riskiness of individual securities? Would you expect this to affect companies' costs of capital?

c. Explain the differences between total risk, diversifiable (company-specific) risk, and market risk.

d. Assume that you choose to hold a single stock portfolio. Should you expect to be compensated for all of the risk that you bear?