David increases the number of companies in which he holds stocks.
A)This reduces risk's standard deviation and firm-specific risk.
B)This reduces risk's standard deviation and market risk.
C)This raises market risk,but lowers firm-specific risk.What happens to overall risk is unclear.
D)This raises firm-specific risk,but lowers market risk.What happens to overall risk is unclear.

Question

Quizplus · Accepted Answer

The more companies in which David holds stocks, the more diversified his portfolio becomes. This leads to a reduction in risk's standard deviation and firm-specific risk because he is no longer heavily reliant on any one company. By increasing the number of companies, he has spread his risk across multiple industries and sectors.

David Increases the Number of Companies in Which He Holds