For a Diversified Portfolio Including a Large Number of Stocks

question 36

Multiple Choice

For a diversified portfolio including a large number of stocks,:

• A) the weighted average expected return goes to zero.
• B) the weighted average of the betas goes to zero.
• C) the weighted average of the unsystematic risk goes to zero.
• D) the return of the portfolio goes to zero.
• E) the return on the portfolio equals the risk-free rate.

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Definitions:

Interest Rate Price Risk

The risk that the value of an investment will decrease due to a change in interest rates.

Zero Coupon Bond

A type of bond that does not pay interest during its life but is sold at a deep discount from its face value.

Reinvestment Rate Risk

The risk that cash flows from an investment will be reinvested at a lower interest rate than the original investment rate, affecting future returns.

Coupon Bond

A type of bond that pays the holder a fixed interest payment (coupon) at regular intervals until the maturity date, at which point the principal is repaid.