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.

Question

Quizplus · Accepted Answer

The weighted average of the unsystematic risk (also known as idiosyncratic or specific risk) tends to go to zero in a well-diversified portfolio. This is because unsystematic risks, which are unique to individual investments, can be nearly eliminated through diversification. Systematic risk, or market risk, remains.

For a Diversified Portfolio Including a Large Number of Stocks