Which one of the following would indicate a portfolio is being effectively diversified?
A) an increase in the portfolio beta
B) a decrease in the portfolio beta
C) an increase in the portfolio rate of return
D) an increase in the portfolio standard deviation
E) a decrease in the portfolio standard deviation

Question

Quizplus · Accepted Answer

Diversification aims to decrease the overall risk of a portfolio. An increase in portfolio beta (A) indicates that it is becoming more risky and correlated with the market, which is not an effective diversification strategy. An increase in portfolio rate of return (C) may indicate higher returns but does not necessarily mean effective diversification. An increase in portfolio standard deviation (D) indicates an increase in volatility, also not a good indicator of diversification. A decrease in portfolio standard deviation (E) indicates lower volatility and therefore better diversification.

Which One of the Following Would Indicate a Portfolio Is