A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, because the independent risks are averaged out. This is also referred to as diversification of risks.

Question

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Holding a portfolio of stocks with independent risks helps reduce overall risk through diversification. The independent risks of individual stocks may not all move in the same direction at the same time, and so the risks are averaged out, leading to a more stable and less volatile portfolio.

A Portfolio of Stocks Where Each Stock Has a Large