Question

As the number of stocks in a portfolio is increased:

Select one:

a. unique risk decreases and becomes equal to market risk

b. market risk decreases

c. unique risk decreases and approaches zero

d. total risk approaches zero

Answer 1

Option 'c' is correct

unique risk decreases and approaches zero.

When the number of stocks in a portfolio increases the unsystematic risk also known as unique risk decreases, and overall portfolio risk approaches to zero. the risk of the given portfolio is influenced by the risk of all constituent securities and correlation among them and not by the number of securities in the portfolio. but the specific risk of the portfolio decreases at the decreasing rate.