When attempting random diversification, the addition of more stocks to a portfolio that are not perfectly positively correlated will:
A) increase the riskiness of the portfolio.
B) decrease the riskiness of the portfolio but not eliminate it.
C) have no effect on the riskiness of the portfolio.
D) increase the systematic risk but have no effect on the unsystematic risk.

Question

Quizplus · Accepted Answer

Random diversification, by adding stocks that are not perfectly positively correlated, spreads out the risk (unsystematic risk) across different investments, thereby reducing the overall riskiness of the portfolio. However, it does not eliminate risk entirely, as systematic risk remains.

When Attempting Random Diversification, the Addition of More Stocks to a Portfolio