Factor Risk Is Not Diversifiable in the Context of a Portfolio

question 15

Multiple Choice

Factor risk is not diversifiable in the context of a portfolio because:

• A)the portfolios with approximately equal weight on all securities have residuals with standard deviations that are approximately directly proportional to the square root of the number of securities.
• B)when more securities are added to the portfolio,the total risk of the portfolio will be the cumulative risk of the individual securities.
• C)the portfolios with different weights on all securities have residuals with standard deviations that are approximately inversely proportional to the square root of the total market capitalization.
• D)the returns due to each factor?s realized values are perfectly correlated across securities.