When Investment Returns Are Less Than Perfectly Positively Correlated,the Resulting

question 26

Multiple Choice

When investment returns are less than perfectly positively correlated,the resulting diversification effect means that:

• A) making an investment in two or three large stocks will eliminate all of the unsystematic risk.
• B) making an investment in three companies all within the same industry will greatly reduce the systematic risk.
• C) spreading an investment across five diverse companies will not lower the total risk.
• D) spreading an investment across many diverse assets will eliminate all of the systematic risk.
• E) spreading an investment across many diverse assets will eliminate some of the total risk.

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Definitions:

Socially Optimal

Refers to a situation where goods or services are produced and consumed at a level that maximizes overall social welfare.

Pollution

The contamination of the environment with harmful or poisonous substances, adversely affecting the health of living organisms and ecosystems.

External Costs

Costs of an economic activity that are not borne by the participants but rather by other people or society at large.

Tax

A compulsory financial charge imposed by a government on individuals or entities to fund various public expenditures.