Question

Which of the following statements is FALSE?

a)

The volatility of a portfolio tends to decrease with the number of stocks that it contains.

b)

Fluctuations in the price of a stock due to news that affects all firms in the economy are not diversifiable.

c)

Fluctuations in the price of a stock due to news that only affect its associated company are diversifiable.

d)

The empirical evidence shows that the larger the volatility of a stock or portfolio of stocks, the larger is its average return.

e)

Market risk is not diversifiable.

Answer 1

Option D is correct

The statement is FALSE.

There is no evidence that larger the volatility of a stock or portfolio of stocks, the larger is its average return. In fact, higher volatility stocks tend to have negative returns.

Statement a) is TRUE

With the increase in the number of stock in a portfolio, the volatility of the portfolio reduces.

Statements b) and e) are TRUE

Statement b) describes market risk. And, the market risk is not diversifiable.

Statement C) is TRUE

Statement C describes firm specific risk and firm specific risk can be diversified.