2. Which of the following statements is most likely FALSE: Increasing the number of stocks in...
2. Which of the following statements is most likely FALSE:
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Increasing the number of stocks in a portfolio from 10 to 20 will decrease total risk
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Increasing the number of stocks in a portfolio from 10 to 20 will decrease non-systematic
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Decreasing the number of stocks in a portfolio from 20 to 10 will increase non-systematic risk
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Decreasing the number of stocks in a portfolio from 20 to 10 will increase total risk
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Decreasing the number of stocks in a portfolio from 20 to 10 will increase systematic risk
Homework Answers
The false statement is:
Decreasing the number of stocks in a portfolio from 20 to 10 will increase systematic risk
Total Risk has two components- Systematic Risk and Non-Systematic Risk
Systematic Risk is the risk associated with the entire market and not just a particular company or stock. Unsystematic or non-systematic risk is the risk that is particular to a certain company and stock.
Diversification of portfolio reduces the total risk as well as non-systematic risk and vice-versa
Hence, the first 4 statements are true,.
But the 5th statement is false.
Decreasing the number of stocks in portfolio will not increase systematic risk as it is associated with the market.
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