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    Question

    As the number of stocks in a portfolio increases, the

    portfolio’s systematic risk:
    A Decrease at a decreasing rate Correct Answer Incorrect Answer
    B Decreases at an increasing rate Correct Answer Incorrect Answer
    C Increases at a decreasing rate Correct Answer Incorrect Answer
    D Increases at an increasing rate Correct Answer Incorrect Answer
    E Can increase or decrease Correct Answer Incorrect Answer

    Solution

    Systematic risk is risk which affects all and cannot be mitigated or avoided. This is the kind of risk that applies to an entire market or market segment. It is also known as un-diversifiable risk or market risk . As such the portfolio’s systematic risk can be increased by adding higher-risk stocks or decreased by adding lower-risky stocks. When we add more stocks to a portfolio, unsystematic risk (i.e. diversifiable risk) will decrease at a decreasing rate.

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