The variance of a portfolio of assets:
A) decreases as the number of assets increases.
B) increases as the number of assets increase.
C) approaches 0 as the number of assets decreases.
D) approaches 1 as the number of assets increases.

Question

Quizplus · Accepted Answer

The variance of a portfolio of assets decreases as the number of assets increases because diversification reduces the overall risk of the portfolio. Adding more assets to a portfolio reduces the impact of volatility and specific risk, therefore reducing the portfolio's overall variance.

The Variance of a Portfolio of Assets