The most fundamental proposition of modern portfolio theory is that
A) investment risk is reduced by investing in on security.
B) the smaller the standard deviation is, the larger is the risk of a portfolio.
C) even though an asset is risky in isolation, when combined with other assets the risk of the portfolio is less, perhaps even zero.
D) uncertain outcomes make for risky investments.

Question

Quizplus · Accepted Answer

Modern portfolio theory states that by diversifying and combining assets in a portfolio, the overall risk can be reduced. This is because the risk of each individual asset is not perfectly correlated with each other, so when combined, the portfolio's risk can be reduced, potentially even to zero. Therefore, option C correctly explains the fundamental proposition of modern portfolio theory. Options A, B, and D are not accurate descriptions of the theory.

The Most Fundamental Proposition of Modern Portfolio Theory Is That