If a stock portfolio is well diversified, then the portfolio variance:
A) will equal the variance of the most volatile stock in the portfolio.
B) may be less than the variance of the least risky stock in the portfolio.
C) must be equal to or greater than the variance of the least risky stock in the portfolio.
D) will be a weighted average of the variances of the individual securities in the portfolio.
E) will be an arithmetic average of the variances of the individual securities in the portfolio.

Question

Quizplus · Accepted Answer

Diversification can reduce the overall risk of a portfolio to a level that is lower than the risk of the individual securities within the portfolio, including the least risky stock, due to the benefits of combining uncorrelated or negatively correlated assets.

If a Stock Portfolio Is Well Diversified, Then the Portfolio