For a diversiﬁed portfolio including a large number of equities, the:
A)weighted average expected return goes to zero.
B)weighted average of the betas goes to zero.
C)weighted average of the unsystematic risk goes to zero.
D)return of the portfolio goes to zero.
E)return on the portfolio equals the risk-free rate.

Question

Quizplus · Accepted Answer

The weighted average of the unsystematic risk (also known as idiosyncratic or specific risk) of a diversified portfolio approaches zero because unsystematic risks, which are unique to individual investments, tend to cancel out across a large portfolio. Diversification does not eliminate systematic risk (market risk), which is reflected in the portfolio's beta.

For a Diversiﬁed Portfolio Including a Large Number of Equities