Question

Which of the following statements is FALSE? The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. The volatility in a large portfolio will decline until only the systematic risk remains. When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. Fluctuations of a stock's returns that are due to firm-specific news are common risks.

Answer 1

Answer: Under the given option; the statement (d) is false. i.e. Fluctuations of a stock's returns that are due to firm-specific news are common risks.

Fluctuations of a stock's return that are due to market wide news are common risk. These tend to fluctuate with fluctuation in market wide news and several other variables.

Therefore, the statement Fluctuations of a stock's returns that are due to firm-specific news are common risks, is false.

The correct option to this question is (d)