How Many Diverse Securities Are Required to Eliminate the Majority

question 7

Multiple Choice

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

• A) 5
• B) 10
• C) 2
• D) 40
• E) 75

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Definitions:

Principal-agent Relationships

Describes a situation where one party (the principal) hires another (the agent) to perform a task on their behalf, involving issues of trust and responsibility.

Adverse Selection

A situation in financial markets where buyers and sellers have different information, leading to transactions that favor the party with more information, often seen in insurance markets.

Moral Hazard

The risk that one party to a contract can change their behavior to the detriment of another after the contract has been concluded, particularly where one party bears the cost of those actions.

Uncertainty

A state of having limited knowledge where it is impossible to exactly describe existing states or future outcomes.