Question

Which of the following statements is CORRECT?a. Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.b. A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.c. A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.d. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.e. A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

Answer 1

Answer:

a. Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.

Explanation:

Diversifiable risk can as well as be regarded as unsystematic risk, it is specific risk of a firm which impacts the price of the stock of individual rather than affecting the industry as a whole or sector where the the firm is carrying out it's operation. It a risk whereby there is possibility that change in the price of a security will be experienced because of the specific characteristics that the security have. It should be noted that Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.