Question of the Week

In a "fully" diversified portfolio, all of the following would be true except:

A) portfolio standard deviation would be lower than the weighted average of the standard deviations of the individual securities.
B) expected portfolio return would simply be the weighted average of the expected returns of all the individual securities.
C) the expected return of the portfolio will equate that of the expected market return.
D) there would be no unsystematic risk.

Answer:

The correct answer is: C)

A well-diversified portfolio simply implies that all unsystematic risk has been eliminated. It does not mean that portfolio return will equal market return. For example, a very well-diversified portfolio could end up having a beta of .5, which means that it is only half as volatile as the market.




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