An investor maintains a portfolio containing 50 individual U.S. large-cap equities spread across multiple industry sectors. Concerned about potential portfolio downturns driven by macroeconomic instability and unexpected interest rate increases, the investor asks a registered representative how further asset diversification will impact the account's overall exposure. Which of the following statements accurately evaluates the risk characteristics of this portfolio?
- Broad diversification effectively minimizes non-systematic risk, but the portfolio remains fully exposed to market and interest rate risks that cannot be eliminated by adding more equities.Cevap
- BExpanding the portfolio to over 100 individual U.S. large-cap equities will eventually eliminate its systematic risk, fully protecting the account against market-wide downturns.
- CIf prevailing interest rates rise unexpectedly, any high-grade corporate bonds added to the portfolio will gain market value, perfectly offsetting equity market losses.
- DIf the yield curve becomes inverted, it signals rapid economic expansion, confirming that the systematic market risk for equity holdings is virtually non-existent.
Cevap
Broad diversification minimizes non-systematic (company-specific) risk, but systematic risks such as market and interest rate risk affect the entire market and cannot be eliminated through diversification.
Diversification allows investors to reduce non-systematic (specific) risk by spreading investments across multiple companies and industries. However, systematic risk—which includes market risk and interest rate risk—is caused by broad economic factors affecting the entire market. Therefore, adding more equities to a portfolio cannot eliminate systematic risk.
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Anahtar Kavram
Systematic risk (market risk) affects the entire market and cannot be eliminated through diversification, unlike non-systematic risk.