The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities.
A) I and III only
B) II and IV only
C) I and II only
D) I, II, and III only
E) I, II, III, and IV

Question

Quizplus · Accepted Answer

The expected return on a portfolio can indeed exceed the expected return of the best performing security in the portfolio due to diversification benefits, making statement I incorrect. Statement II is true because diversification cannot result in a portfolio return lower than the worst performing security assuming no leverage. Statement III is true because diversification reduces unsystematic risk, which is specific to individual securities. Statement IV is incorrect because the portfolio's expected return is highly dependent on how the portfolio is allocated among individual securities.

The Expected Return on a Portfolio