Which of the following is true concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated.

A) The risk of the portfolio is certain to be increased as securities are added.
B) As more securities are added to the portfolio, the market risk of the portfolio declines.
C) After about 10 securities are added to the portfolio, additional securities have essentially no impact on reducing risk.
D) As more and more securities are added to the portfolio, the level of risk approaches the level of systematic risk in the market.
E) If you hold more than 100 securities, then the portfolio is risk-free.

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tianze jiang · Accepted Answer

Final Answer : D, Explanation :  Diversification reduces unsystematic risk. As more securities are added, the portfolio's risk approaches the systematic risk inherent in the market, because unsystematic risk (specific to individual securities) is diversified away.

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