Practice Quiz

FINRA Series 6

Category - Series 6

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By investing in a diversified portfolio, an investor will:
  1. lower both his risk and his expected return.
  2. lower his risk without affecting his expected return.
  3. lower his risk and increase his expected return.
  4. eliminate all the market risk associated with his investment portfolio.
Explanation
Answer: B - By investing in a diversified portfolio, an investor will lower his risk without affecting his expected return. In diversifying, he selects securities whose returns do not move together. This does not affect the expected returns of the individual securities and, by extension, his portfolio of securities. When he does so, he is diversifying away the unsystematic (non-market) risk associated with the individual securities. Market risk is the risk that all firms face to one degree or another and cannot be diversified away.
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