Question

The risk of a completely diversified portfolio ______________. Group of answer choices can be regarded as...

The risk of a completely diversified portfolio ______________.

Group of answer choices

can be regarded as the standard deviation of the market portfolio

has only systematic risk and no unsystematic risk

can be regarded as the variance of the market portfolio

has only unsystematic risk and no systematic risk

A portfolio of two perfectly _________ stocks has no diversification effect

Group of answer choices

uncorrelated

positively correlated

negatively correlated

risk-free

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Homework Answers

Answer #1

Question 1: has only systematic risk and no unsystematic risk

Systematic risk or non-diversifiable risk is the risk that cannot be diversified away and is the one for which market compensates the investors. Non-systematic risk or firm specific risk is the risk that would be removed or minimal in a well diversified portfolio. Systematic risk is measured by 'Beta'.

Question 2: positively correlated

A portfolio of two perfectly positively correlated stocks would have no diversification effect. This is because the returns of the two stocks would be highly related and would move in the same direction. For the diversification to work, there should be minimal correlation between the two stock.

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