The risk of a completely diversified portfolio ______________. Group of answer choices can be regarded as...

The risk of a completely diversified portfolio ______________. Group of answer choices

can be regarded as the variance of the market portfolio

has only unsystematic risk and no systematic risk

has only systematic risk and no unsystematic risk

can be regarded as the standard deviation of the market portfolio

Solutions

Expert Solution

The correct answer is has only systematic risk and no unsystematic risk

There are two types of Risk

Systematic Risk - It is the volatility of a stock on account of economy wide factors. It affects all stocks in the same direction with unequal sensitivity. It is the risk which is inherent to the market and it cannot be avoided through diversification.

Unsystematic Risk - It is the volatility of a stock on account of internal company specific factors. This risk can be avoided through diversification. The greater the number of stocks in the portfolio the greater is the chance of Unsystematic Risk getting cancelled out. The Unsystematic risk can be eliminated by holding a completely diversified portfolio.

Investors are exposed to a variety of risks when investing in securities. Some of the risks are associated with economic events that can be linked to risk and return. Systematic Risk or Market risk that the investors cannot eliminate even in a completely diversified portfolio.

jeff jeffy answered 1 year ago

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