As diversification increases, the standard deviation of a portfolio approaches
A)0.
B)1.
C)infinity.
D)the standard deviation of the market portfolio.

Question

Quizplus · Accepted Answer

As diversification increases, the unsystematic risk (specific to individual investments) is reduced, and the portfolio's total risk approaches the systematic risk, which is the risk inherent to the entire market. Therefore, the standard deviation of a highly diversified portfolio approaches the standard deviation of the market portfolio, not zero, one, or infinity.

As Diversification Increases, the Standard Deviation of a Portfolio Approaches