There are in total 9 questions 1. Which portfolio has the least risk during the

Question

There are in total 9 questions 1. Which portfolio has the least risk during the period 1900 2011? (0.5) A. B. Common stocks Government bonds Treasury bills None of the answers D. Answer 2. The type of the risk that can be eliminated by diversification is called: (05) A. B. C. D. interest rate default risk riskmarketrisk unique risk Answer is the slope on the Security Market une (as) marketrisk premium (i.e., quity risk premium) risk-free rate market rate of return beta 3. The A. B. C. D. Answer 4. As the number of stocks in a portfoliois increased:(0.5) unique risk decreases and approaches zero market risk decreases unique risk decreases and becomes equal to market risk total risk approaches zero D.

Explanation / Answer

ANSWER 2: Correct option is D that is Unique risk.

Unique risk is comapny specific or popularly known as mutual fund where the money is invested in different companies to minimise the loss.

Explanation :

First of all we will understand meaning of diversification. By diversification we can understand that the investment is done in various securities or other so that the risk of loss can be minimised.

- Interest rate risk arises due to fluctuation in interest rates and it cannot be eliminated by the diversification as each bond or securities or other carry there own interest rate.

- Default risk is the risk of non payment of dues or loans and it can also not be diversified.

- Market risk is the risk that arises out of market situation it can be hedged but cannot be diversified.

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