Question

When investment returns are less than perfectly positively correlated, the resulting diversification effect means that

• making an investment in two or three large stocks will eliminate all of the unsystematic risk.

• None of the options are correct.

• making an investment in three companies all within the same industry will greatly reduce the systematic risk.

• spreading an investment across many diverse assets will eliminate all of the systematic risk.

• spreading an investment across many diverse assets will eliminate some of the total risk.

• spreading an investment across five diverse companies will not lower the total risk.

Answer 1

Option e .is correct option spreading an investment across many diverse assets will eliminate some of the total risk.

Option a is incorrect investing in 2or 3 stocks may not reduce the unsystematic risk to if their correlation is not perfectly negative
Option c is incorrect because systematic risk is undiversifiabe risk and cannot be minimized.
Option d is incorrect because systematic risk is undiversifiabe risk and cannot be minimized
Option f is incorrect because total risk includes systematic and non systematic risk And diversification reduces unsystematic risk