Which of the following statements about risk are correct?
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Which of the following statements about risk are correct?

  1. Firms are affected by both systematic and

firm-specific risk, but only the firm- specific risk will be diversified when we combine many stocks into a portfolio.

  • Because investors are risk averse, they will demand a risk premium for taking unsystematic risk.
  • The risk premium for non-diversifiable risk is zero.
  • Because investors can eliminate firm-specific risk by diversifying their portfolios,
  • they are not compensated for holding firm-specific risk.

  • Answers:

    I and II only

    I and IV only

    II and III only

    I, II, and III only

    I, II and IV only

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