Which statements are TRUE regarding risk and return?
Statement I: Diversification is the process of removing systematic risk from a portfolio.
Statement II: In general, the greater the risk, the greater the return required by an investor.
Statement III: Investors should focus on real returns if they are concerned about the purchasing power of their wealth.
A) Statement I only
B) Statements I and III only
C) Statements II and III only
D) Statements I and II only

Question

Quizplus · Accepted Answer

Statement I is incorrect because diversification removes unsystematic risk, not systematic risk. Systematic risk is inherent to the entire market and cannot be eliminated through diversification. Statement II is correct as it reflects the risk-return trade-off principle, where higher risk investments are expected to provide higher returns. Statement III is also correct because real returns, which are adjusted for inflation, give a more accurate picture of the purchasing power of the returns on an investment.

Which Statements Are TRUE Regarding Risk and Return