Which of the following statements is most correct?
A) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio.
B) If you form a large portfolio of stocks each with a beta greater than 1.0, this portfolio will have more market risk than a single stock with a beta = 0.8.
C) Company-specific (or unsystematic) risk can be reduced by forming a large portfolio, but normally even highly diversified portfolios are subject to market (or systematic) risk.
D) Answers a, b, and c are correct.
E) Answers b and c are correct.

Question

Quizplus · Accepted Answer

Option A is incorrect because even a highly diversified portfolio cannot completely eliminate market risk. Option B is incorrect because a portfolio with high beta stocks will have more market risk than a single stock with a lower beta. Option C is correct because company-specific risk can be reduced by forming a diversified portfolio, but the portfolio would still be subject to market risk. Therefore, options B and C are correct, and the answer is E.

Which of the Following Statements Is Most Correct