Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?
A) Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market.
B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
E) Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Question

Quizplus · Accepted Answer

Given the unequal weights of securities and economic states, through diversification and careful selection, it's theoretically possible to construct a portfolio with an expected standard deviation of zero, especially if the securities have perfectly negatively correlated returns in different states of the economy.

Which One of the Following Statements Is Correct Concerning a Portfolio