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,
5. they are not compensated for holding firm-specific risk.

Answers:

I and II only

I and IV only

II and III only

I, II, and III only

I, II and IV only