As diversification increases, the standard deviation of a portfolio approaches
A) 0.
B) 1.
C) infinity.
D) the standard deviation of the market portfolio.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

Diversification reduces the unique risks associated with individual investments. As diversification increases, the portfolio's risk (measured by standard deviation) approaches the market risk, which cannot be diversified away. This concept is a fundamental principle of modern portfolio theory.

As Diversification Increases, the Standard Deviation of a Portfolio Approaches