For a highly diversified equally weighted portfolio, the portfolio variance is:
A) the average covariance.
B) the average expected value.
C) the average variance.
D) the weighted average expected value.
E) the weighted average variance.

Question

Quizplus · Accepted Answer

In a highly diversified equally weighted portfolio, the individual asset variances become less significant, and the portfolio variance converges towards the average covariance among the assets. This is because the diversification effect reduces the impact of individual asset volatility, making the relationships between assets (covariances) more important for determining the portfolio's overall risk.

For a Highly Diversified Equally Weighted Portfolio, the Portfolio Variance