The principle of diversification tells us that Select one: a. the riskiness of a portfolio will...
The principle of diversification tells us that
Select one:
a. the riskiness of a portfolio will decrease exponentially if we add to the portfolio assets with low standard deviations.
b. total risk of a portfolio will be reduced by lowering its unsystematic risk.
c. total risk of a portfolio can be eliminated by including as many stocks with different levels of systematic risk as possible.
d. the addition of more stocks from different industries will always reduce the risk in a portfolio.
e. an index fund is the best investment due to its well-diversified portfolio.
Homework Answers
b. total risk of a portfolio will be reduced by lowering its unsystematic risk.
This is the correct statement. Due to diversification, the unsystematic risk can be diversified away by carefully including securities with low correlation. Systematic risk cannot be diversified away.
a is incorrect as riskiness does not decrease exponentially. c is incorrect as systematic risk can never be eliminated. d is incorrect as this will depend on the correlation among the stocks and not particularity industries. e is not related to the principle of diversification.
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