As we add more uncorrelated stocks to a portfolio where the stocks are held in equal weights,the benefit of diversification is most dramatic:
A)after 20 stocks have been added.
B)when there are more than 500 stocks.
C)when there are more than 1000 stocks.
D)at the outset.
E)when there are more than 100 stocks.

Question

Quizplus · Accepted Answer

The benefit of diversification is most dramatic at the outset because adding the first few stocks to a portfolio significantly reduces its overall risk. As more stocks are added, especially if they are uncorrelated, the marginal benefit of adding each additional stock decreases. This is due to the principle that the initial stocks diversify away a larger portion of the unsystematic, or specific, risk associated with individual investments.

As We Add More Uncorrelated Stocks to a Portfolio Where