Which of the following statements is correct? A) Portfolio diversification reduc

Question

Which of the following statements is correct? A) Portfolio diversification reduces the variability of the returns on the individual stocks held in a portfolio. B) Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification, we would expect Portfolio B to have lower risk. C) If an investor buys enough stocks, he or she can, through diversification, eliminate all market risk. D) Diversification can be achieved by purchasing stocks that are perfectly positively correlated.

Explanation / Answer

Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification, we would expect Portfolio B to have lower risk is correct because level of uncorrelation between two or more assets reduce the value of portfolio standard deviation than that of weighted average standard deviation of individual assets.

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