A firms beta coefficient is a proxy for its market-related


A firm’s beta coefficient is a proxy for its market-related risk. As the firm’s beta coefficient increases, so does its market-related risk. One way to reduce the effect of firm-specific risk is to establish a portfolio of investments, such that the effect of each firm’s non-market related risk is attenuated. As such, a portfolio’s beta coefficient is the weighted average of each firm’s beta coefficient. What then is the net effect on the portfolio’s beta coefficient as the number of assets in the portfolio approaches that of the market? Explain.

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Financial Management: A firms beta coefficient is a proxy for its market-related
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