Which statement about portfolio diversification is correct?

Question

Quizplus · Accepted Answer

As more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate, as the benefits of diversification become smaller with each additional security added. However, proper diversification cannot eliminate systematic risk (risk inherent in the market or economy as a whole) but can reduce unsystematic risk (risk specific to individual securities or sectors). Also, diversification does not necessarily reduce the portfolio's expected return, but rather it can improve the risk-return tradeoff by lowering the portfolio's overall risk level. Finally, there is no specific number of securities required for meaningful risk reduction through diversification, as the degree of risk reduction will depend on the specific characteristics of the securities and their correlations with each other.

Which Statement About Portfolio Diversification Is Correct