In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches
A) one.
B) infinity.
C) zero.
D) negative one.
E) none of these.

Question

Quizplus · Accepted Answer

According to the Arbitrage Pricing Theory, the nonsystematic risk, also known as idiosyncratic risk, is diversifiable and can be reduced by building a well-diversified portfolio. As the portfolio becomes larger, the effect of idiosyncratic risk on the overall risk of the portfolio decreases, eventually approaching zero. Therefore, the correct answer is C, zero. The other options are incorrect as one and infinity are not possible values and negative one does not make sense in this context.

In the Context of the Arbitrage Pricing Theory,as a Well-Diversified