Question

what is the benefit of choosing an exchange - traded fund over an individual stock?
an exchange - traded fund will have a higher return than an individual stock
an exchange - traded fund has a higher variance than an individual stock.
an exchange - traded fund eliminates more systemic risk than an individual stock.
an exchange - traded fund is diversified and therefore carries less risk than an individual stock.

Explanation:

• Option 1: ETFs don't guarantee higher returns than individual stocks; returns depend on various factors.
• Option 2: ETFs, being diversified, typically have lower variance (risk) than individual stocks, so this is incorrect.
• Option 3: Systemic risk (market - wide risk) can't be eliminated by diversification; only unsystematic risk is reduced.
• Option 4: ETFs hold a basket of assets, so they are diversified. Diversification reduces unsystematic risk, meaning they generally carry less risk than an individual stock (which has concentrated risk in one company).

Answer:

D. An exchange - traded fund is diversified and therefore carries less risk than an individual stock.