As Diversification Increases, the Standard Deviation of a Portfolio Approaches

question 27

Multiple Choice

As diversification increases, the standard deviation of a portfolio approaches

• A)0.
• B)1.
• C)infinity.
• D)the standard deviation of the market portfolio.
• E)None of the options

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Definitions:

Escalation Of Commitment

The phenomenon where people increase their investment in a decision despite evidence suggesting it may be wrong.

Rational Model

A decision-making approach based on careful analysis and logical evaluation of alternatives to achieve the most favorable outcome.

Decision Making

The cognitive process of selecting a course of action among multiple alternatives, often resulting in a final choice or judgment.

Bounded Rationality

A concept suggesting that decision-making is limited by the information available, cognitive limitations of minds, and finite time to make decisions.