Which of the following statements about risk are correct?

1. Firms are affected by both systematic and firmspecific 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 systematic risk.

3. Because investors can eliminate firmspecific risk by diversifying their portfolios, they are not compensated for holding firmspecific risk.

4. The risk premium for systematic risk is zero.

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