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.

2. Because investors are risk averse, they will demand a risk premium for taking unsystematic risk.

3. The risk premium for non-diversifiable risk is zero.

4. Because investors can eliminate firm-specific risk by diversifying their portfolios,

   they are not compensated for holding firm-specific risk

1. I and II only

2. I and IV only

3. II and III only

4. I, II, and III only

5. I, II and IV only