In the context of portfolio diversification,

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A stock index mutual fund is a financial intermediary that offers small investors a way to participate in the performance of the stock market as a whole. This is a form of diversification because the fund holds stocks from a variety of companies, thereby reducing the risk of any one company's performance impacting the entire portfolio. Option A is incorrect because investors are not compensated for diversifiable risk, but rather non-diversifiable risk. Option B is incorrect as holding only three to five stocks would not provide sufficient diversification. Option D is incorrect because financial intermediaries can actually make it easier for investors to achieve diversification by pooling their funds and investing in a diversified portfolio.

In the Context of Portfolio Diversification