Increasing the number of stocks in a portfolio would likely __________________.
Group of answer choices
I and IV only
II only
I only
II and III only
The correct answer is I only
Unsystematic Risk - It is the volatility of a stock on account
of internal company specific factors. This risk can be avoided
through diversification. The greater the number of stocks in the
portfolio the greater is the chance of Unsystematic Risk getting
cancelled out.
Therefore by increasing the number of stocks in a portfolio
the unsystematic risk of the portfolio would decrease.
Systematic Risk is the volatility of a stock on account of economy wide factors. It affects all stocks in the same direction with unequal sensitivity. It is the risk which is inherent to the market and it cannot be avoided through diversification. This risk is also known as undiversifiable risk. Increasing number of stocks will not affect the systematic or undiversifiable risk.
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