As randomly selected securities are combined to create a portfolio, the ___________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is___________risk, while that remaining is ___________risk.
A) total; diversifiable; nondiversifiable
B) relevant; irrelevant; total
C) diversifiable; nondiversifiable; total
D) total; nondiversifiable; diversifiable

Question

Quizplus · Accepted Answer

As more securities are added to a portfolio, the diversifiable risk (also known as unsystematic risk) decreases. This is because diversifiable risk is specific to individual securities and can be mitigated through diversification. The remaining risk is nondiversifiable risk (also known as systematic risk), which affects the entire market and cannot be eliminated through diversification.

As Randomly Selected Securities Are Combined to Create a Portfolio