Which of the following statements is CORRECT?
A) the higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
B) it is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
C) once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
D) an investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.
E) an investor can eliminate virtually all market risk if he or she holds a very large and well-diversified portfolio of stocks.

Question

Quizplus · Accepted Answer

Diversifiable risk, also known as unsystematic risk, can be reduced through diversification. Holding a large and well-diversified portfolio of stocks can eliminate virtually all diversifiable risk, but it cannot eliminate market risk, also known as systematic risk. Market risk affects the entire market or a specific segment of the market and cannot be diversified away. Therefore, option D is the correct statement. Options A, B, and C are all incorrect statements. Option E is partially correct, as a well-diversified portfolio can reduce market risk, but not eliminate it entirely.

Which of the Following Statements Is CORRECT