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which of the following statements is true about diversification and risk? With higher number of assets,...

  1. which of the following statements is true about diversification and risk?

    1. With higher number of assets, the company specific risk approaches zero and total

      portfolio risk falls to the systematic risk (market risk)

    2. With higher number of assets, the company specific risk approaches the systematic risk

      (market risk)

    3. With higher number of assets, the total portfolio risk increases to the sum of the

      individual company specific risk and the systematic risk (market risk)

    4. With higher number of assets, total portfolio risk approaches the sum of the company

      specific risk

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Answer #1

Answer - With higher number of assets, the company specific risk approaches zero and total portfolio risk falls to the systematic risk (market risk)

As the number of assets in portfolio increases, the company specific risk decreases and the portfolio would only have systematic or market risk remaining that would affect the portfolio.

Total risk in portfolio = Systematic risk + Unsystematic risk

Unsystematic risk would be almost 0 in a diversified portfolio. Hence total risk would almost be equal to systematic risk.

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