Which of the Following Statements Is FALSE

question 53

Multiple Choice

Which of the following statements is FALSE?

• A)The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk.
• B)When we combine many stocks in a large portfolio,the firm-specific risks for each stock will average out and be diversified.
• C)Fluctuations of a stock's returns that are due to firm-specific news are common risks.
• D)The volatility in a large portfolio will decline until only the systematic risk remains.

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Definitions:

Well-Diversified Portfolios

Investment portfolios that contain a wide variety of assets, aiming to minimize risk by spreading investments across different sectors or asset classes.

APT

Abbreviation for Arbitrage Pricing Theory, a multifactor financial model that describes the relationship between the return of a portfolio and the return of a single asset through a linear combination of macroeconomic factors.

CAPM

A model identifying the connection between the expected returns of assets, primarily shares, and their associated systematic risk, known as the Capital Asset Pricing Model.

Systematic Risk Factors

Market risks that affect the overall market and cannot be eliminated through diversification, such as interest rates, inflation, and economic cycles.