An increase in the number of corporations in a portfolio from 1 to 10 reduces
A)market risk by more than an increase from 110 to 120.
B)market risk by less than an increase from 110 to 120.
C)firm-specific risk by more than an increase from 110 to 120.
D)firm-specific risk by less than an increase from 110 to 120.

Question

Quizplus · Accepted Answer

An increase in the number of corporations in a portfolio from 1 to 10 reduces firm-specific risk significantly. This is because by investing in multiple corporations, an investor can diversify their portfolio and reduce the risk associated with a single corporation's performance. However, this increase in the number of corporations may not have a substantial effect on market risk, which is influenced by broader economic factors. Therefore, an increase from 110 to 120 may have a more significant impact on reducing market risk than an increase in the number of corporations in a portfolio.

An Increase in the Number of Corporations in a Portfolio