Question

holding a portfolio of securities across sections and industries can reduce risk through diversification because

a) it lowers the individual securities risk premiums

b) it lowers the portfolio's non diversifiable risk

c)it reduces systemic risk of the portfolio

d) the portfolio standard deviation is lower than the weighted average of the individual security standard deviations

e) it lowers the beta of the portfolio to to 0

Answer 1

Solution.>

Option A is not a correct answer. Diversification does not lower the individual securities risk premiums.

Option B is not a correct answer. Non-Deversifiable risk is market/Systematic risk which cannot be lowered.

Option C is not a correct answer. Systematic risk/market risk cannot be lowered by diversification.

Option D is a correct answer. the portfolio standard deviation is lower than the weighted average of the individual security standard deviations.

Option E is not a correct answer. Diversification soes not lower the beta to zero.

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