Question

In a well-diversified portfolio:A. market risk is negligible.B. systematic risk is negligible.C. non-systematic or idiosyncratic risk is negligibleD. non-diversifiable risk is negligible.E. all risks have been diversified away

Answer 1

The correct answer is C. Non-systematic or idiosyncratic risk is negligible. A well-diversified portfolio reduces the idiosyncratic or non-systematic risks associated with individual securities, but systematic risks, such as market or interest rate risk, cannot be diversified away.