Which of the following statements is NOT true about one-factor models and diversification?
A) it leads to an averaging of factor risk
B) for a well-diversified portfolio, factor risk will be insignificant
C) it can substantially reduce nonfactor risk
D) for a well-diversified portfolio, nonfactor risk will be insignificant

Question

Quizplus · Accepted Answer

For a well-diversified portfolio, factor risk remains significant because it is systematic risk inherent to the entire market or market segment, which cannot be eliminated through diversification. Nonfactor risk, which is diversifiable, becomes insignificant in a well-diversified portfolio, not the factor risk.

Which of the Following Statements Is NOT True About One-Factor