A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

Question

Quizplus · Accepted Answer

Diversification helps to reduce the total risk of a portfolio by spreading it across different assets. This means that even if one asset (such as a stock) is quite risky, its contribution to the overall risk of the portfolio can be smaller if it is combined with other assets that have different risk characteristics. Therefore, the statement is true.

A Stock Might Be Quite Risky If Held by Itself