Google Answers Logo
View Question
Q: Finance ( Answered 5 out of 5 stars,   1 Comment )
Subject: Finance
Category: Business and Money > Finance
Asked by: baseball2-ga
List Price: $5.00
Posted: 26 Jul 2005 15:29 PDT
Expires: 25 Aug 2005 15:29 PDT
Question ID: 548243
I am confused in the difference between a diversified portfolio and a
diversified portfolio. Can either be tices as volatile as a market
portfolio with a beta of 2?

Request for Question Clarification by omnivorous-ga on 26 Jul 2005 16:40 PDT
> the difference between a diversified portfolio and a diversified portfolio <

Baseball2 --

Phrased that way, so too am I!  And I'm also confused by reference to
a market portfolio with a beta of 2, as a "market portfolio" has a
beta of 1.  It's the broad portfolio by which we measure variance of
particular stocks.  If you mean a portfolio of x stocks with a beta of
2, be very careful with the terminology.

Best regards,


Clarification of Question by baseball2-ga on 26 Jul 2005 17:02 PDT
Okay....I will try again and if it still does not make sense just let
me know and I think I will give up for the night:)

It is more of a true or false question. I should have used the words
diversified and versified for the beta of 2.

But at any rate....Is it true that a diversified portfolia with a beta
of 2 is twice as volatile as the market porfolio.

Or is it true that a non-diversified portfolio with a beta of 2 is
twice of volatile as the market portfolio.

Now you indicated that a market portfolio only has a beta of
1....which may already answer my question?

Thank and sorry for the confusion.
Subject: Re: Finance
Answered By: omnivorous-ga on 27 Jul 2005 03:00 PDT
Rated:5 out of 5 stars
Baseball2 ?

?Beta? is a measure of the co-variance of a company?s stock with the
broad market.  As I?m sure you?re aware, we often use a broad market
index, like the Standard & Poor 500 or the Wilshire 5000 or the FTSE
as a market index.

What is it specifically?  It?s the non-diversifiable risk of the
company ? which includes not just company-specific risk but also
industry risks.

Thus, if you wanted to enjoy the higher returns of a growing industry
such as semiconductors or Internet routers, you?d want a diversified
portfolio of many or all of the companies in that segment.  You?d
likely end up with a higher beta of perhaps 2.0 ? but have diversified
the risks of individual companies and their product/market/financial

So, it?s true that a diversified portfolio with a beta of 2 is twice
as volatile as the market portfolio.  A non-diversified portfolio (an
example would be just 2 semiconductor stocks) might temporarily have a
beta of 2 but returns would be dominated by company-specific risks of
one or the other of your stocks.  Imagine, for example, holding only
Intel and LSI Logic stock ? then having Andy Grove defect to a new
startup semiconductor company.  That?s the kind of firm-specific risk
that a non-diversified portfolio can?t handle.

?Beta Coefficient? (July 24, 2005)


A comment is probably necessary here: the confusion over ?diversified?
and ?non-diversified? is probably due to the difference between common
terminology and the statistical measurement.

A portfolio of semiconductor stocks would be thought by most to be
?undiversified.?  Indeed, if you follow the search strategy below,
you'll see specific mutual funds referring to their investment
strategy as "concentrated" or "un-diversified," even though they may
be well-diversified within a sector (such as corporate bonds or
semiconductor stocks).

And for a broad market a semiconductor portfolio is "undiversified" ?
it will tend to have more U.S. stocks; it will have little in real
estate assets; it won?t correlate well with commodity pricing.  A
recent (May 11) Wall Street Journal article talks about the
?most-diversified? portfolio and says that if you want to replicate
global markets MSCI Global Capital Markets says the ?optimal?
distribution is:
*  U.S. stocks: 25.9%
*  U.S. bonds: 21.1%
*  Foreign stocks: 26.4%
*  Foreign bonds: 26.6%

But from a statistical standpoint, a portfolio of semiconductor stocks
can be diversified.  You?re trying to eliminate firm-specific risk,
while accepting the risk AND growth rate of the industry.  Studies
show that with as few as 10 stocks, you can accomplish this.

Google search strategy:
diversified ?non-diversified? portfolio beta

Best regards,

baseball2-ga rated this answer:5 out of 5 stars

Subject: Re: Finance
From: livioflores-ga on 26 Jul 2005 22:24 PDT
Take a look to the "cached" results (to see the highlights) of the
following search results page:

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy