The addition of a risky security to a fully diversified portfolio:
A)will increase the unsystematic risk of the portfolio
B)may or may not affect the portfolio beta
C)must decrease the portfolio's expected return
D)must increase the portfolio beta
E)will have no effect on the portfolio beta or its expected return

Question

Quizplus · Accepted Answer

The addition of a risky security may or may not affect the portfolio beta, depending on the correlation between the security and the existing assets in the portfolio. If the security is highly correlated with the existing assets, it may increase the portfolio's systematic risk and beta. However, if the security has a low correlation, it may actually decrease the portfolio's beta. The addition of a risky security does not necessarily have to decrease the portfolio's expected return or increase the unsystematic risk.

The Addition of a Risky Security to a Fully Diversified