Question

As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.
a.total; diversifiable; nondiversifiable
b.diversifiable; nondiversifiable; total
c.relevant; irrelevant; total
d.total; nondiversifiable; diversifiable

Answer 1

Answer:

a) Total; Diversifiable; Non-Diversifiable

Explanation:

Risk refers to the uncertainty of returns, chances of loss while investment. Securities have risk, their price might fall much, as to incur loss for the security holder.

Diversifiable Risk is the risk component due to features particular to the security, not due to general market situation. Non Diversifiable risk is the risk component due to general economic & market position features, not due to particular to the security.

Securities portfolios are created to diversify the risk. But, this reduces only the diversifiable (security particular) risk. Non Diversifiable (common market) risk is common to all the securities, so it can't be diversified.

Hence, Securities combined to create portfolio : Risk of portfolio by including 10 - 20 securities reduces Total Risk. It eliminates Diversifiable Risk, but the Non Diversifiable Risk still remains.