Which of the Following Is True Concerning Diversification? Assume That

question 5

Multiple Choice

Which of the following is true concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated.

• A) The risk of the portfolio is certain to be increased as securities are added.
• B) As more securities are added to the portfolio, the market risk of the portfolio declines.
• C) After about 10 securities are added to the portfolio, additional securities have essentially no impact on reducing risk.
• D) As more and more securities are added to the portfolio, the level of risk approaches the level of systematic risk in the market.
• E) If you hold more than 100 securities, then the portfolio is risk-free.

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Definitions:

Marginal Tax Rate

The rate at which an additional dollar of income is taxed, showing the percentage of tax applied to your next dollar of taxable income.

Average Tax Rate

Total tax paid divided by total taxable income or some other base (such as total income) against which to compare the amount of tax paid. Expressed as a percentage.

Progressive Tax

At the individual level, a tax whose average tax rate increases as the taxpayer’s income increases. At the national level, a tax for which the average tax rate (= tax revenue/GDP) rises with GDP.

Exhaustive Governmental Outlay

Total government spending on goods and services that are directly consumed or invested, excluding transfer payments such as subsidies or social security benefits.