Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.
A) increase the systematic risk of the portfolio
B) increase the unsystematic risk of the portfolio
C) increase the return of the portfolio
D) decrease the variation in returns the investor faces in any one year

Question

Quizplus · Accepted Answer

Decreasing the number of stocks in a portfolio from 50 to 10 increases the unsystematic risk (also known as diversifiable risk or specific risk) because it reduces the diversification of the portfolio. Unsystematic risk is the risk associated with individual assets, and diversification can reduce this type of risk. By holding fewer stocks, the portfolio is more exposed to the risks specific to those stocks, rather than spreading the risk across a wider array of investments.

Decreasing the Number of Stocks in a Portfolio from 50