Question

Increasing the number of stocks in a portfolio from 10 to 50 would likely ____ decrease the systematic risk of the portfolio decrease the firm-specific risk of the portfolio decrease the return of the portfolio increase the variation in returns the investor faces in any one year

Answer 1

Answer: decrease the firm specific risk of the portfolio

Explanation: Systematic risk can be explained as vulnerabilities which affects the entire market. They are usually caused by external factors such as economic and policy events which are very unpredictable and almost unpreventable. Firm specific risk on the other hand are attributed to a specific market and are divesifiable. A portfolio of 50 is much less risky than a portfolio of 10.