Which statement about portfolio diversification is correct?
A)Proper diversification can eliminate systematic risk.
B)The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased.
C)Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return.
D)Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.
E)None of the above statements are correct.

Question

Quizplus · Accepted Answer

Adding more securities to a portfolio can reduce total risk, but at a decreasing rate. This is because the benefits of diversification diminish as more securities are added. However, diversification does not completely eliminate systematic risk (A) and the number of securities needed for meaningful risk reduction depends on factors such as the correlation among those securities (B). As for C, diversification can actually increase expected return by allowing for exposure to a broader range of investment opportunities.

Which Statement About Portfolio Diversification Is Correct