Which statement about portfolio diversification is true? a. Proper diversification can eliminate systematic risk. b. •The risk-reducing benefits of diversification will not occur if the risky assets are not correlated. Proper diversification can reduce the total risk to zero. • Diversification could reduce a portfolio's total risk but does not affect the portfolio's expected return. e. None of the options. C.
Which statement about portfolio diversification is true? a. Proper diversification can eliminate systematic risk. b. •The risk-reducing benefits of diversification will not occur if the risky assets are not correlated. Proper diversification can reduce the total risk to zero. • Diversification could reduce a portfolio's total risk but does not affect the portfolio's expected return. e. None of the options. C.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:QUESTION 3
Which statement about portfolio diversification is true?
a. Proper diversification can eliminate systematic risk.
b. The risk-reducing benefits of diversification will not occur if the risky assets are not correlated.
C.
Proper diversification can reduce the total risk to zero.
d. Diversification could reduce a portfolio's total risk but does not affect the portfolio's expected return.
None of the options.
e.
Expert Solution
Step 1
Portfolio diversification refers to that investment strategy in which investments are made in different types of assets and in different securities.
This is done with the objective of reducing the overall risk of the portfolio. There are two types of risks that a financial asset is exposed to – systematic risk and unsystematic risk. Systematic risk is risk inherent to the entire market and unsystematic risk is risk that is specific to an industry or a security but not the entire market.
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