Question

1. Describe what happens to portfolio risk as more and more assets are added to portfolio?...

1. Describe what happens to portfolio risk as more and more assets are added to portfolio?

2. How does systematic risk differ from unsystematic risk?

3. Identify which of the following are unsystematic or systematic risks?

a) Labor union at Caterpillar declared a strike

b) Contrary to what was stated President was reelected.

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Homework Answers

Answer #1

1.

As more and more assets are added to the portfolio, the unsystematic risk approaches zero and only systematic risk remains. So portfolio risk approaches systematic risk

2.

Systematic risk affects all the firms

Unsystematic risk or unique risk or firm specific risk affects only select few firms

Unsystematic risk can be diversified

Systematic risk can not be diversified

3.

Unsystematic risk as it affects only Caterpillar

4.

Systematic risk as it affects all firms

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