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Which of the statements about investment risk is not correct? Select one: a. By putting shares...

Which of the statements about investment risk is not correct?

Select one:

a. By putting shares into a portfolio, one share's increase in the return can be offset by the decrease in another share's return, thus reducing the volatility in the aggregate portfolio return.

b. The market portfolio is fully diversified and thus has no risk.

c. Diversification helps reduce the idiosyncratic risk.

d. A sudden decrease in the share price due to the exposure of a company's financial scandal is an example of unsystematic risk.

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Answer #1

b. The market portfolio is fully diversified and thus has no risk.

This statement is not correct. The market portfolio is a diversified portfolio with negligible unsystematic risk. However, systematic or market risk can never be diversified away fully.

a is correct since this is the benefit of portfolio. c is correct since diversification reduces the unsystematic or the idiosyncratic risk. d is correct since any risk associated only with a particular company is an example of unsystematic risk.

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