If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?
A) Adding more such stocks will increase the portfolio's expected rate of return.
B) Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
C) Adding more such stocks will have no effect on the portfolio's risk.
D) Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.
E) Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

Question

Quizplus · Accepted Answer

Adding more randomly selected stocks to a portfolio can help reduce its unsystematic, or diversifiable, risk. This is because the risk of individual stocks tends to cancel each other out when combined in a portfolio, as the risks of one stock's positive and negative movements might be offset by those of another stock. However, it would not necessarily have an impact on the portfolio's systematic, or market-related, risk, as this is determined by broader economic factors that affect the overall market.

If You Randomly Select Stocks and Add Them to Your