Which of the following statements about portfolio diversifications are correct? Check all that apply. The risk of a portfolio declines as the number of stocks in the portfolio increases. By adding enough partially correlated stocks, risk can be completely eliminated. The higher the stocks' correlation coefficients, the lower the portfolio's risk. Stocks with perfectly negatively correlated returns do not exist.

Question

Business

Karla Strong

24 October, 14:23

Which of the following statements about portfolio diversifications are correct? Check all that apply. The risk of a portfolio declines as the number of stocks in the portfolio increases. By adding enough partially correlated stocks, risk can be completely eliminated. The higher the stocks' correlation coefficients, the lower the portfolio's risk. Stocks with perfectly negatively correlated returns do not exist.

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Answers (1)

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Mary Andrade · Answer 1

The risk of a portfolio declines as the number of stocks in the portfolio increases.

Explanation:

In simple words, diversification refers to the benefit of lesser risk that a manager gets by adding negatively or less correlates securities in the portfolio.

However, it is a fact that risk can only be minimized and cannot be eliminated completely. The risk that is specific to the business is called systematic risk and due to its unpredictability it cannot be diversified away.

Thus, from the above we can conclude that the correct option is A.