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Question

As the number of stocks in a portfolio increases, the portfolio’s systematic risk:

A Can increase or decrease Correct Answer Incorrect Answer
B Decrease at a decreasing rate Correct Answer Incorrect Answer
C Decreases at an increasing rate Correct Answer Incorrect Answer
D Can increase Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

When we add more stocks to a portfolio, unsystematic risk will decrease at a decreasing rate. However, the portfolio’s systematic risk can be increased by adding higher-risk stocks or decreased by adding lower-risky stocks.

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