If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then the portfolio:
A) appears to be well diversified.
B) has a beta of 0.
C) has very little systematic risk.
D)has a risk premium lower than the market.

Question

Quizplus · Accepted Answer

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, it indicates that the portfolio has a low level of unsystematic risk and appears to be well diversified. This means that the portfolio's returns move in tandem with the market index, which is expected if the portfolio is well diversified. Therefore, option A is the best choice. Options B, C, and D are incorrect because a high correlation with the market index does not necessarily imply a beta of 0, very little systematic risk or a risk premium lower than the market.

If the Plotting of a Portfolio's Returns Against Returns on the Market