Which statement about portfolio diversification is correct?

A) Proper diversification can eliminate systematic risk.
B) The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased.
C) Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return.
D) Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.
E) None of the statements are correct.

Question

David Brown · Accepted Answer

Final Answer : D, Explanation :  Diversification reduces a portfolio's unsystematic risk, and as more securities are added, the total risk decreases but at a diminishing rate due to the presence of systematic risk that cannot be diversified away.

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