Answer the following two questions.Assume that the portfolio weights are positive:
-1) Can the return on a portfolio ever be less than the smallest return on an individual security in the portfolio?
2) Can the risk (variance) of a portfolio ever be less than the smallest risk (variance) of an individual security in the portfolio?
A) No. Yes.
B) No. No.
C) Yes. No.
D) Yes. Yes.

Question

Quizplus · Accepted Answer

Comment:  1) The return on a portfolio is the weighted average of the returns of the individual securities within the portfolio. If the weights are all positive, then the portfolio return will never be less than that of the security with the smallest return - it's mathematically impossible.
2) The reason for diversification is to reduce the risk (variance). If the covariance is small (negative) then some portfolios have less variance than any individual securities in the portfolio. Think of the bathing suit and umbrellas company example in the Diversification video.

Answer the Following Two Questions