Question

Increasing the number of stocks in a portfolio would likely __________________. decrease the unsystematic risk of...

Increasing the number of stocks in a portfolio would likely __________________.

  1. decrease the unsystematic risk of the portfolio
  2. decrease the systematic risk of the portfolio
  3. increase the undiversifiable risk of the portfolio
  4. increase the diversifiable risk of the portfolio

Group of answer choices

I and IV only

II only

I only

II and III only

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Homework Answers

Answer #1

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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