As diversification increases,the unsystematic risk of a portfolio approaches ____________.
A)1
B)0
C)infinity
D)n-1 * n
E)none of the above

Question

Quizplus · Accepted Answer

As diversification increases, the unsystematic risk of a portfolio approaches zero. This is because unsystematic (or idiosyncratic) risk is the risk that is specific to a particular company or industry and can be diversified away by investing in a variety of assets. As we add more and more assets to a portfolio, the impact of any one asset on the overall risk of the portfolio diminishes, reducing the unsystematic risk of the portfolio. Therefore, option B, which says that the unsystematic risk of a portfolio approaches zero, is the correct answer.

As Diversification Increases,the Unsystematic Risk of a Portfolio Approaches ____________