Assuming that stocks represent most industries,the number of stocks necessary to eliminate nearly all unsystematic risk varies from ________.
A)5 to 10
B)10 to 20
C)20 to 30
D)30 to 50

Question

Quizplus · Accepted Answer

According to the principle of diversification, holding 20-30 different stocks can eliminate nearly all unsystematic risk. This is because as the number of stocks increases, the unsystematic risk (risk associated with a specific company) gets diluted and is replaced by systematic risk (risk associated with the overall market). Beyond this number, the benefit of diversification becomes relatively limited.

Assuming That Stocks Represent Most Industries,the Number of Stocks Necessary