Question

Which of the following statements about investments are true?

i. Systemic risks usually affect a large number of corporations and can be easily diversified away by holding a portfolio of more than 100 stocks across different industries.

ii. Beta-coefficient measures how sensitive one stock is to unsystematic risks.

iii. Passive investment is based on the replication of the portfolio according to a specific index.

iv. Longer investment horizons in share investments generally provide higher returns than shorter investment horizons.

a) Only i and ii are correct.
b) Only ii and iii are correct.
c) Only i and iii are correct.
d) Only i and iv are correct.
e) Only iii and iv are correct.
f) Only ii and iv are correct.

Answer 1

The true investment statements are that passive investment is based on replicating a portfolio according to a specific index, and longer investment horizons in share investments tend to provide higher returns than shorter ones.

Step-by-step explanation:

Among the given statements about investments, the following are true:

• Systemic risks usually affect a large number of corporations. However, systemic risk cannot be easily diversified away because it impacts the entire market or a large segment of the market as opposed to specific sectors or stocks.
• Beta-coefficient measures the sensitivity of a stock to market movements, or systemic risk, not unsystematic risk, which is specific to an individual stock or industry.
• Passive investment strategy indeed involves the replication of the portfolio according to a specific index, often practiced through index funds.
• Generally, longer investment horizons in share investments have the potential to provide higher returns than shorter investment horizons due to the compound interest effect and the time value of money, as well as the opportunity for the investment to recover from short-term fluctuations.

Therefore, the correct answer is that statements iii (Passive investment is based on the replication of the portfolio according to a specific index) and iv (Longer investment horizons in share investments generally provide higher returns than shorter investment horizons) are true.