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Diversification works because Unsystematic risk exists Forming portfolios of stock reduces stand deviation of returns of each stock Firm specific can be dramatically reduced 1

Diversification works because

Unsystematic risk exists
Forming portfolios of stock reduces stand deviation of returns of each stock
Firm specific can be dramatically reduced

1 only
1 and 2 only
2 only
3 only
1 and 3 only

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