23.2
2. How does holding stocks in a portfolio reduce your exposure to
unsystematic risk?(4 pts)
Holding a large portfolio of stocks with less than perfect correlation produces a diversification effect. This effect is due to the fact that unsystematic events do not strike all companies at the same time, so when some of your stocks have negative unsystematic events, others will have positive ones. Thus, the shocks will be offset and the unsystematic risk of the whole portfolio will be reduced.