Which of the following statements is CORRECT?
A) Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.
B) A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
C) A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
D) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
E) A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

Question

Quizplus · Accepted Answer

Diversifiable risk, also known as unsystematic risk or specific risk, can be reduced by forming a large portfolio, but market risk, also known as systematic risk, cannot be diversified away. Even highly diversified portfolios are still subject to market risk.

Which of the Following Statements Is CORRECT