Which one of the following statements related to risk is correct?
A) The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio.
B) Every portfolio that contains 25 or more securities is free of unsystematic risk.
C) The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
D) Adding five additional stocks to a diversified portfolio will lower the portfolio's beta.
E) Stocks that move in tandem with the overall market have zero betas.

Question

Quizplus · Accepted Answer

Systematic risk, or market risk, is the risk that affects the overall market, and can't be eliminated by diversification. Adding T-bills, which are considered risk-free, to a portfolio can effectively lower its systematic risk. The other statements are incorrect. Adding a high standard deviation stock to a portfolio can increase or decrease the portfolio's beta depending on the correlation between the stock and the portfolio. There is no set number of securities that guarantees a portfolio is free of unsystematic risk. Adding more stocks to a diversified portfolio can lower its unsystematic risk, but may not necessarily lower its beta. Stocks that move in tandem with the overall market have a beta of 1.0, not zero.

Which One of the Following Statements Related to Risk Is