ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Reducing the number of stocks held in a portfolio
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Adding bonds to a stock portfolio
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Adding international securities into a portfolio of U.S. stocks
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Adding technology stocks to a portfolio of industrial stocks
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Detailed explanation-1: -Reducing the number of stocks held in the portfolio will not increase, but rather decrease diversification. It would lead to an increase in unsystematic risk. All the other options contain strategies to increase the diversification level of a portfolio.
Detailed explanation-2: -How to Reduce Unsystematic Risk. This risk can be reduced by diversifying one’s investments across multiple industries. By doing so, the risks associated with each security in the portfolio will tend to cancel each other out. The best way to reduce unsystematic risk is to diversify broadly.
Detailed explanation-3: -Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk. Once diversified, investors are still subject to market-wide systematic risk. Total risk is unsystematic risk plus systematic risk.
Detailed explanation-4: -a warehouse fire This is an unsystematic risk as it affects only the company whose warehouse is destroyed.