Studies of common stock returns have shown that total portfolio risk declines:
A) As the number of security holdings increases.
B) Security returns are less than perfectly correlated.
C) As diversification increases.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

Studies of common stock returns have demonstrated that total portfolio risk decreases as the number of security holdings increases, when security returns are less than perfectly correlated, and as diversification increases. This is because diversification spreads out the risk across different investments, reducing the impact of any single investment's poor performance on the overall portfolio.

Studies of Common Stock Returns Have Shown That Total Portfolio