Which of the following statements best describes what you should expect to happen if you randomly select stocks and add them to your portfolio?
A) Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
B) Adding more such stocks will increase the portfolio's expected rate of return.
C) Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
D) Adding more such stocks will have no effect on the portfolio's risk.

Question

Quizplus · Accepted Answer

Adding more stocks to a portfolio generally reduces unsystematic risk, which is the risk specific to individual stocks, through diversification. However, it does not affect systematic risk, which is inherent to the entire market.

Which of the Following Statements Best Describes What You Should