BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Proper diversification can reduce or eliminate systematic risk
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The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual
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Because diversification reduces a portfolio’s total risk, it necessarily reduces the portfolio’s expected
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Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a
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Detailed explanation-1: -The answer is C. As more securities are added to a portfolio, total risk typically would be expected to fall at a decreasing rate. The market portfolio which consists of all the listed securities is assumed to offer optimal diversification benefits to the investor.
Detailed explanation-2: -Answer and Explanation: The answer is C). Diversification is achieved by pooling assets together into a portfolio. This could reduce total risk by reducing the variance of returns of the portfolio.
Detailed explanation-3: -Which of the following statements best describes the principle of diversification? Spreading an investment across many diverse assets will eliminate all of the systematic risk.
Detailed explanation-4: -Diversification lets you reduce the risk of your portfolio without sacrificing potential returns. As you diversify by adding more and different investments to a portfolio, you lower your potential risk of loss. A fully diversified portfolio has the least possible risk for a given expected return.
Detailed explanation-5: -Answer and Explanation: The correct answer is d) Idiosyncratic risk. Idiosyncratic risk/ unsystematic risk is the risk inherent to a specific asset and can be diversified away by including more and more assets in the portfolio that have a low correlation with each other.