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Which of the following is true about diversification? a. The expected return on a risky asset...

Which of the following is true about diversification?

a. The expected return on a risky asset depends on that asset’s unsystematic risk

b. Portfolio diversification is the investment in several but same asset classes or sectors/industry

c. Beta is a measure of systematic risk

d. There is a large portion of unsystematic risk in a well diversified portfolio

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Answer #1

Answer - Option c

Beta measures the systematic risk within a security or portfolio. Higher the beta, higher the systematic risk.

Option a is incorrect. Expected return on a risky asset depends on asset's systematic risk. Market compensates investor only for systematic portion of total risk.

Option b is incorrect. Portfolio diversification is investment in several assets, which can be from different classes as well.

Option d is incorrect. There is no unsystematic portion in a well-diversified portfolio. Well-diversified portfolio eliminates unsystematic risk.

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