SIE practice questionhardRisk — Non-Systematic Risk Reduction
Which portfolio is MOST effectively diversified to reduce unsystematic risk?
- A20 stocks spread across technology, healthcare, financials, consumer staples, and utilities
- BBoth B and C effectively reduce unsystematic risk✓ Correct answer
- C50 different oil and gas stocks
- DOne index fund tracking the S&P 500
Explanation
Why B — Both B and C effectively reduce unsystematic risk
Both B and C effectively reduce unsystematic risk. Portfolio B diversifies across multiple sectors, and Portfolio C (S&P 500 index fund) holds 500 stocks across all sectors. Portfolio A (50 oil stocks) has high concentration in one sector — if the energy industry suffers, all 50 stocks could decline together. True diversification requires spreading across different sectors, not just holding many securities in the same industry.
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