Question

    What will be the impact on the unsystematic risk of a

    portfolio as the number of stocks in a portfolio increases?
    A It can increase or decrease Correct Answer Incorrect Answer
    B It will decrease at a decreasing rate Correct Answer Incorrect Answer
    C It will decrease at an increasing rate Correct Answer Incorrect Answer
    D It will increase at a decreasing rate Correct Answer Incorrect Answer
    E It will increase at an increasing rate 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-risk stocks.

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