If a large number of diverse securities are added to a portfolio comprised of three stocks,then the:
A)weighted average expected return goes to zero.
B)weighted average of the factor betas goes to zero.
C)weighted average of the unsystematic risk goes to zero.
D)return of the portfolio must equal the market rate of return.
E)return of the portfolio will equal the risk-free rate.

Question

Quizplus · Accepted Answer

By diversifying a portfolio, unsystematic risk (also known as idiosyncratic risk or specific risk) can be nearly eliminated. This is because unsystematic risks, which are unique to individual assets, tend to cancel out across a large portfolio of diverse securities. Systematic risk, or market risk, remains.

If a Large Number of Diverse Securities Are Added to a Portfolio