If a Large Number of Diverse Securities Are Added to a Portfolio

question 52

Multiple Choice

If a large number of diverse securities are added to a portfolio comprised of three stocks,then the:

• A)weighted average expected return goes to zero.
• B)weighted average of the factor betas goes to zero.
• C)weighted average of the unsystematic risk goes to zero.
• D)return of the portfolio must equal the market rate of return.
• E)return of the portfolio will equal the risk-free rate.

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Definitions:

Perfectly Competitive

A market structure characterized by a large number of buyers and sellers, homogenous products, no barriers to entry or exit, and perfect information among market participants.

Normal Good

A good for which demand increases when consumer income rises, showing a positive relationship between income and demand.

Income Rises

An increase in the amount of money or value earned or received by an individual, business, or country over a certain period.

Leisure

A period of free time not taken up by work, domestic responsibilities, or other obligatory tasks, often used for rest, recreation, or cultural activities.