Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?
A) The expected return of your portfolio is likely to decline.
B) The diversifiable risk will remain the same, but the market risk will likely decline.
C) Both the diversifiable risk and the market risk of your portfolio are likely to decline.
D) The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.
E) The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.

Question

Quizplus · Accepted Answer

Adding more stocks to a portfolio generally reduces diversifiable risk (also known as unsystematic risk) because the effects of individual stock volatility are minimized. However, market risk (systematic risk), which affects all stocks, does not change with diversification.

Which of the Following Is Most Likely to Occur as You