Diversification of a portfolio
A)can eliminate market risk,but it cannot eliminate firm-specific risk.
B)can eliminate firm-specific risk,but it cannot eliminate market risk.
C)increases the portfolio's standard deviation.
D)is not necessary for a person who is risk averse.

Question

Quizplus · Accepted Answer

Diversification can help in reducing the risk associated with a particular firm or security held in the portfolio by investing in multiple firms or securities. However, it cannot eliminate market risk entirely, as this risk affects the entire market or economy. Therefore, option B is the correct answer. Option A is incorrect because diversification helps eliminate firm-specific risk but not market risk. Option C is incorrect because diversification reduces the portfolio's risk and standard deviation. Option D is incorrect because diversification is essential for managing risk regardless of whether the investor is risk-averse or not.

Diversification of a Portfolio