Which of the following statements is most correct?
A) Portfolio diversification reduces the variability of the returns on the individual stocks held in the portfolio.
B) Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification,we would expect Portfolio B to have the lower relevant risk,but it is possible for Portfolio A to be less risky.
C) If an investor buys enough stocks,he or she can,through diversification,eliminate all of the nonmarket (or company-specific)risk inherent in owning stocks.Indeed,if the portfolio contained some of all publicly traded stocks,it would be riskless.
D) Statements a,b,and c are all true.
E) Statements a,b,and c are all false.

Question

Quizplus · Accepted Answer

While diversification does generally reduce the variability of returns, it is possible for a portfolio with just one security to have lower risk than a diversified portfolio if that security has low correlation with the market or other risky assets. Statement C is false as it is impossible to eliminate all nonmarket or company-specific risk. While diversification can reduce this type of risk, events such as a global recession or political instability can still affect all stocks in the market. Statement A is partially true, as diversification reduces the variability of returns on individual stocks, but it does not eliminate this variability entirely.

Which of the Following Statements Is Most Correct