Asked by Roselyn Villaruz on May 13, 2024
Verified
Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,which currently consists of three average stocks?
A) The diversifiable risk of your portfolio will likely decline, but the market risk should not be expected to change.
B) The diversifiable risk will remain the same, but the market risk will likely decline.
C) Both the diversifiable risk and the market risk of your portfolio are likely to decline.
D) The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.
Diversifiable Risk
A type of risk that can be reduced or mitigated through diversification or spreading investments across different assets to reduce exposure to any single risk.
Market Risk
The potential for financial loss due to fluctuations in market conditions, such as changes in stock prices, interest rates, or exchange rates.
Randomly Selected Stocks
Stocks chosen without any specific pattern, criteria, or bias, often used in sampling or experimental portfolios.
- Execute the principles of diversifying investments to recognize their effect in reducing exposure to risk.
- Compare and contrast systematic risk associated with the overall market and unsystematic risk, which can be diversified away.
Verified Answer
Learning Objectives
- Execute the principles of diversifying investments to recognize their effect in reducing exposure to risk.
- Compare and contrast systematic risk associated with the overall market and unsystematic risk, which can be diversified away.
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