Question

Which of the following is not correct?

a. A risk averse person might be willing to hold stocks.

b. Other things the same, a portfolio with the stocks of a large number of companies has less risk.

c. Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return.

d. Diversification can eliminate market risk but not firm-specific risk.

Answer 1

Option D is not correct

Step-by-step explanation:

Diversification is a method which is used to reduce firm-specific risk. Investors try to construct a portfolio which helps to maintain a reasonable profit. Market risk which is the Beta cannot be eliminated and every firm has to bear it, no matter how the portfolio is constructed. For example, if an investor invests in two stocks, if one stock goes down the other will compensate the negative returns. So, diversification is a technique to reduced firm-specific returns.