A well-diversified portfolio is defined as
A) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero.
B) one that contains securities from at least three different industry sectors.
C) a portfolio whose factor beta equals 1.0.
D) a portfolio that is equally weighted.

Question

Quizplus · Accepted Answer

A well-diversified portfolio is one that holds a large enough number of different securities such that the unsystematic (or specific) risk is nearly eliminated. This is because unsystematic risk, which is unique to individual securities, can be reduced through diversification, whereas systematic risk, which affects the market as a whole, cannot.

A Well-Diversified Portfolio Is Defined as