Explain why the risk premium of a stock does not depend on its diversifiable ris

Question

Explain why the risk premium of a stock does not depend on its diversifiable risk. (Select the best choice below.) A. Investors care about diversifiable risk, but hedge their positions so they don't demand a risk premium. B. Investors don't care about diversifiable risk and so don't hold any. C. Although investors must hold diversifiable risk, they don't care about it, so there is no risk premium. D. Investors can remove diversifiable risk from their portfolio by diversifying. They therefore do not demand a risk premium for it.

Explanation / Answer

Option D. Since diversifiable risk can be eliminated by holding more no of stocks in the portfolio, so they do not demand premiun on it

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