Which of the following is an underlying principle of the portfolio theory?

A) Both systematic and unsystematic risk can be eliminated through diversification.
B) Portfolio owners are concerned with the performance of the entire portfolio rather than that of the individual stocks in it.
C) The lower the returns on a stock are, the higher is its risk.
D) A stock's risk is independent of its return.

Question

Dontrell Brown · Accepted Answer

Final Answer : B, Explanation :  The underlying principle of portfolio theory is that portfolio owners are concerned with the performance of the entire portfolio rather than that of the individual stocks in it. This means that the focus is on achieving the best possible risk-adjusted return for the portfolio as a whole, rather than trying to maximize returns for individual stocks. Diversification is an important tool in achieving this goal, as it helps to reduce overall risk by spreading investments across multiple assets. While both systematic and unsystematic risk can be reduced through diversification, they cannot be fully eliminated. The relationship between a stock's risk and return is also significant in portfolio theory, as investors seek to balance the potential risks and rewards of each individual investment.

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