In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches
A)one.
B)infinity.
C)zero.
D)negative one.
E)none of the above.

Question

Quizplus · Accepted Answer

The Arbitrage Pricing Theory states that the expected return of a well-diversified portfolio can be explained by a linear combination of different macroeconomic factors (systematic risk) and the idiosyncratic factors (nonsystematic risk) specific to individual assets. As the size of the portfolio increases, the impact of idiosyncratic risk decreases and approaches zero, making the portfolio more diversified and less exposed to asset-specific risks. Therefore, the best choice is C, which states that the nonsystematic risk approaches zero as the portfolio becomes larger.

In the Context of the Arbitrage Pricing Theory,as a Well-Diversified