Question
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
Multiple select question.
It is likely to decrease.
It is likely to increase.
It will not change.
It may eventually be almost totally eliminated.
Multiple select question.
It is likely to decrease.
It is likely to increase.
It will not change.
It may eventually be almost totally eliminated.
Answers
GPT-4o mini
As more securities are added to a portfolio, the total unsystematic risk of the portfolio will:
- **It is likely to decrease.**
- **It may eventually be almost totally eliminated.**
Unsystematic risk, also known as specific or idiosyncratic risk, is the risk that is unique to a particular company or industry. By adding more securities to a portfolio, particularly those that are not highly correlated with each other, the diversifiable or unsystematic risk can be reduced. With a sufficiently large and diverse portfolio, unsystematic risk can be minimized to the point of being almost entirely eliminated.
Systematic risk, however, which is tied to the overall market, cannot be eliminated through diversification.
- **It is likely to decrease.**
- **It may eventually be almost totally eliminated.**
Unsystematic risk, also known as specific or idiosyncratic risk, is the risk that is unique to a particular company or industry. By adding more securities to a portfolio, particularly those that are not highly correlated with each other, the diversifiable or unsystematic risk can be reduced. With a sufficiently large and diverse portfolio, unsystematic risk can be minimized to the point of being almost entirely eliminated.
Systematic risk, however, which is tied to the overall market, cannot be eliminated through diversification.