Diversification can eliminate:
A) all risk in a portfolio.
B) risk only if the investor is risk averse.
C) the systematic risk in a portfolio.
D) the idiosyncratic risk in a portfolio.

Question

Quizplus · Accepted Answer

Diversification can eliminate the idiosyncratic risk in a portfolio, which is the risk that is specific to a particular company or sector. However, it cannot eliminate systematic risk, which is the risk that affects the entire market or economy. Therefore, option A is incorrect. Option B is also incorrect as diversification is effective even if the investor is not risk-averse. Option C is also incorrect as systematic risk is inherent in the market and cannot be diversified away.

Diversification Can Eliminate