Which of the Following Is Most Likely to Occur as You

question 74

Multiple Choice

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,which currently consists of three average stocks?

• A)The diversifiable risk of your portfolio will likely decline, but the market risk should not be expected to change.
• B)The diversifiable risk will remain the same, but the market risk will likely decline.
• C)Both the diversifiable risk and the market risk of your portfolio are likely to decline.
• D)The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

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Definitions:

Shoeleather Costs

Shoeleather costs are the metaphorical costs of inflation, referring to the time and effort spent trying to avoid holding onto cash as it loses value.

Real Interest Rate

The rate of interest an investor expects to receive after allowing for inflation.

CPI

Consumer Price Index, a measure that examines the weighted average of prices of a basket of consumer goods and services, used as an indicator of inflation.

Fisher Effect

A theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates.