- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 62. Portfolio Risk and Return: Part I
- Subject 5. Portfolio Risk
CFA Practice Question
Which of the following statements concerning diversification is incorrect?
A. The primary factor affecting the diversification of a portfolio is each security's covariance with the other securities in the portfolio.
B. Proper diversification can eliminate market risk.
C. Diversification can reduce portfolio risk only if the security return correlation is less than 1.0.
Explanation: Proper diversification can eliminate non-market or unsystematic risk, not market risk.
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