Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,which currently consists of three average stocks?
A)The diversifiable risk of your portfolio will likely decline, but the market risk should not be expected to change.
B)The diversifiable risk will remain the same, but the market risk will likely decline.
C)Both the diversifiable risk and the market risk of your portfolio are likely to decline.
D)The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

Question

Quizplus · Accepted Answer

As you add randomly selected stocks to your portfolio, you increase the diversification of your portfolio, which reduces diversifiable risk. However, the market risk (systematic risk) is not affected by the number of stocks you add to your portfolio. Therefore, the diversifiable risk of your portfolio is likely to decline, but the market risk should not be expected to change.

Which of the Following Is Most Likely to Occur as You