In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches
A) one.
B) infinity.
C) zero.
D) negative one.

Question

Quizplus · Accepted Answer

The Arbitrage Pricing Theory (APT) posits that as a portfolio becomes more diversified, its nonsystematic (or idiosyncratic) risk, which is unique to individual assets, is reduced. In the limit of a perfectly diversified portfolio, nonsystematic risk approaches zero because the unique risks of individual assets cancel out.

In the Context of the Arbitrage Pricing Theory, as a Well-Diversified