Explanation:
The correct answer is A.
Holding the market portfolio is generally advisable because individual stocks contain idiosyncratic (firm-specific) risk that does not carry an expected risk premium. By diversifying and holding the market portfolio, investors can eliminate idiosyncratic risk and only bear systematic (market) risk, for which they are compensated with a risk premium. According to the CAPM, only systematic risk is rewarded, making the fully diversified market portfolio the optimal choice for asset owners.
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Q.3017 Which of the following reasons best explains why it is advisable for asset owners to hold the market portfolio as compared to individual stocks?
A
The individual stocks are not only exposed to the market factor which carries the risk premium, but they also have idiosyncratic risk.
B
Individual stocks represent a systemic risk, and it is not passive since all risky assets have risk premiums that are only determined by their exposure to the market portfolio.
C
The market portfolio is not held by every investor, which has a strong implication that is not outright rejected in the data.
D
It can not be determined
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