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Question 17.19: Indicate why you agree or disagree with the following statem...

Indicate why you agree or disagree with the following statements:
a. “As a percentage of the total risk, the unsystematic risk of a diversified portfolio is greater than that of an individual asset.”
b. “An investor should be compensated for accepting unsystematic risk.”

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a. Disagree: Unsystematic risk is nearly eliminated in a diversified portfolio, whereas the unsystematic risk of an individual asset in the portfolio may be significant.
b. Disagree: Investors are compensated only for the risk that they cannot get rid of; investors are not compensated for diversifiable (that is, unsystematic) risk because they could reduce it if they wished to by diversifying.

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