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If I am holding stock Z in a diversified portfolio, and John is holding it outside...

If I am holding stock Z in a diversified portfolio, and John is holding it outside a diversified portfolio, which one of us will be willing to pay more for the stock? Why?

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Answer #1

John will be willing to pay more for the stock.

Increasing the number of stocks in a portfolio increases the diversification. Ie the benefits of diversification will increase and the unsystematic risk will be reduced and the rik of the portfolio will be limited to the systematic risk ie the portfolio beta.

John is just holding it outside portfolio has he needs to pay more to reap benefits of the diversification although I ama already holding stock Z in my portfolio so there is not much incentive for me to add the same at a higher price.

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