Which of the following reduces risk in a portfolio the greatest ?
Correct answer: C. Increasing the number of shares in the portfolio from 1 to 10
- A. Increasing the number of shares from 10 to 20
- B. All of these answers provide the same amount of risk reduction
- C. Increasing the number of shares in the portfolio from 1 to 10
- D. Increasing the number of shares from 20 to 30
Explanation
Diversification reduces firm-specific risk most sharply when a portfolio expands from very few holdings, especially from one to ten. Further additions still help, but each extra share provides a smaller reduction in risk.
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