Modern portfolio theory suggests that:
A)it is always wise to create a stock portfolio that captures a high average rate of return.
B)the higher the expected return, the higher the portfolio's risk.
C)it is always wise to create a stock portfolio consisting of similar stocks.
D)a riskless portfolio is always the wisest alternative.

Question

Quizplus · Accepted Answer

Modern portfolio theory suggests that there is a positive relationship between risk and expected return. This means that the higher the expected return, the higher the portfolio's risk. The theory also suggests that diversification can help manage risk by combining assets that are not perfectly correlated, which can reduce overall portfolio risk without sacrificing returns. Therefore, it is not always wise to create a stock portfolio consisting of similar stocks (C) or to create a riskless portfolio (D). While capturing a high average rate of return may be desirable, it must be balanced with the level of risk the investor is willing to take on (A).

Modern Portfolio Theory Suggests That