The idea that there is a limit to the reduction of portfolio risk due to diversification is
A) contradicted by both the CAPM and the single-index model.
B) contradicted by the CAPM.
C) contradicted by the single-index model.
D) supported in theory, but not supported empirically.
E) supported both in theory and by empirical evidence.

Question

Quizplus · Accepted Answer

The idea that there is a limit to the reduction of portfolio risk due to diversification is supported both in theory and by empirical evidence. Diversification can reduce unsystematic risk, but systematic risk remains, indicating a limit to risk reduction through diversification. This concept is foundational in modern portfolio theory and is supported by empirical studies showing that beyond a certain number of stocks, additional diversification benefits are minimal.

The Idea That There Is a Limit to the Reduction