Which of the following is true regarding random diversification?
A)Investment characteristics are considered important in random diversification.
B)The net benefit of random diversification eventually disappears as more securities are added.
C)Random diversification,if done correctly,can eliminate all risk in a portfolio.
D)Random diversification eventually removes all company specific risk from a portfolio.

Question

Quizplus · Accepted Answer

Random diversification is a strategy where an investor adds a large number of securities from different industries or sectors to their portfolio to reduce unsystematic risk. However, there is a point where adding more securities does not add any further diversification benefits, and the net benefit of random diversification eventually disappears. This is known as the "elbow point." Therefore, option B is correct, while options A, C, and D are incorrect.

Which of the Following Is True Regarding Random Diversification