CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Which statement about portfolio diversification is correct?
A. Proper diversification reduces a portfolio's expected return because it can reduce or eliminate the portfolio's systematic risk.
B. As more securities are added to a portfolio, total risk typically would be expected to fall at a decreasing rate.
C. The risk-reducing benefits of diversification do not occur meaningfully until at least 30 individual securities are included in a portfolio.

User Contributed Comments 7

User Comment
murli Decreasing rate because systametic risk cannot be reduced.
jrensen diversification reduces unsystemactic risk... they asked about systematic.
luccky can any 1 explain pl.
Tony1234 I think total risk will fall because the more securities you add nonsytematic risk decreases less and less each time, until all you have is systematic risk. At that point adding more secuurities does not give you added diversification benefit.
charomano May I add that even with diversification , one could earn higher return. You could diversify with Zero correlation (unpredicted returns or losses) or by negative correlation that will offset losses, thus a gain in 1 stock could be minmized by the other losing stock.
Sheeb The reason why C is incorrect is because you still benefit from diversification even if you have not at least 30 stocks. Having >30 stocks only helps reducing unsystemactic risk.
Jdadd21 Total Risk = Systematic Risk + Nonsystematic Risk, so by reducing one of the inputs, total risk decreases
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