Which of the following statements best describes risk?
A) An investor can eliminate virtually all market risk if he or she holds a very large and well- diversified portfolio of stocks.
B) The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
C) It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
D) An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

Question

Quizplus · Accepted Answer

Risk can be divided into two types: systematic (or market) risk and unsystematic (or diversifiable) risk. Systematic risk is inherent in the overall market and cannot be diversified away by holding a large and well-diversified portfolio. On the other hand, unsystematic risk can be eliminated by holding a large and well-diversified portfolio. Therefore, option D is the correct statement. Option A is not completely true as there is always some level of market risk even in a well-diversified portfolio. Option B is false as the higher the correlation between stocks in a portfolio, the higher is the risk inherent in the portfolio. Option C is also false as a well-diversified portfolio can have less market risk than a single stock.

Which of the Following Statements Best Describes Risk