In practice, most of the idiosyncratic risk from the assets in a diversiﬁed portfolio can be eliminated when the portfolio has approximately _____ diverse securities.
A)3
B)6
C)30
D)50
E)75

Question

Quizplus · Accepted Answer

The concept of diversification states that by investing in a portfolio of different assets, the overall risk of the portfolio can be reduced. However, not all risk can be eliminated. Idiosyncratic risk refers to the risk that is specific to a particular security and cannot be diversified away. According to modern portfolio theory, a well-diversified portfolio should contain at least 30 different securities to eliminate most of the idiosyncratic risk. Therefore, the best choice is option C, which states that a portfolio should have approximately 30 diverse securities.

In Practice, Most of the Idiosyncratic Risk from the Assets