Question

Macro events only are reflected in the performance of the market portfolio because: A) The market...

Macro events only are reflected in the performance of the market portfolio because:

A) The market portfolio contains only risk-free securities

B) Only macro events are tracked by economists

C) The unique risks have been diversified away

D) The firm-specific events would be too numerous to quantify

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Answer #1

C) the unique risks have been diversified away

Theoretical market portfolio is completely diversified. It does not house any unsystematic risk associated with the individual components or stocks of the portfolio. But, the market portfolio, does have some systematic risk or undiversifiable risk, which can't be moved away with. These risks include macro events as well.

Also, recollect the beta of market portfolio is 1. A risker portfolio would have a beta > 1. Risk free asset has Beta of ZERO.

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