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

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago

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