In: Finance
Portfolio diversification eliminates which one of the following?
Group of answer choices
Market risk
Total investment risk
Reward for bearing risk
Portfolio risk premium
Security risk
Option E is correct: Security risk
Portfolio diversification eliminates security risk. Holding a large number of stocks in the portfolio eliminates firm-specific risk also called security risk. In other words, the security risk is diversified away in a diversified portfolio.
Option A is incorrect because the market risk cannot be eliminated with a diversified portfolio
Option B is incorrect because The total investment risk consists of market risk and security risk. The portfolio diversification does not eliminate market risk.
Option C is incorrect because Portfolio diversification lowers the reward, but it doesn't completely eliminate the reward for bearing risk
Option D is incorrect because portfolio risk premium (rm - rf) still exists in a diversified portfolio because of the market risk