Which of the following is a correct statement about diversiﬁcation?
A) Most diversiﬁcation beneﬁts are realized with just 10 stocks.
B) Diversiﬁcation is the process of reducing the riskiness associated with individual assets by spreading an investment across numerous assets.
C) Diversiﬁable risk is the only risk that matters to a rational investor.
D) When a stock is combined into a portfolio, the standard deviation of that portfolio remains unchanged.
E) There is no limit to the amount of risk that can be eliminated through diversiﬁcation.

Question

Quizplus · Accepted Answer

Diversification involves spreading an investment across numerous assets to reduce risk. While there is no set number of stocks needed for diversification, research has shown that most diversification benefits are realized with 12-18 well-selected stocks. Diversifiable risk is only one type of risk to consider, as investors must also assess market risk and systemic risk. Combining stocks into a portfolio can reduce the portfolio's overall risk, as long as the stocks are not perfectly positively correlated. However, the standard deviation of the portfolio will likely change based on the specific stocks included and their correlation with one another. There is a limit to the amount of risk that can be eliminated through diversification, as diversification cannot eliminate systemic risk.

Which of the Following Is a Correct Statement About Diversiﬁcation