Asked by Roselyn Villaruz on May 13, 2024

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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.
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JJ
Jinzhou JiangMay 17, 2024
Final Answer :
A
Explanation :
As you add randomly selected stocks to your portfolio, you increase the diversification of your portfolio, which reduces diversifiable risk. However, the market risk (systematic risk) is not affected by the number of stocks you add to your portfolio. Therefore, the diversifiable risk of your portfolio is likely to decline, but the market risk should not be expected to change.