The variance of a portfolio containing n assets with independent returns:
A) increases as n increases.
B) decreases as n increases.
C) is constant for any n greater than two.
D) does not change in a predictable way when n increases.

Question

Quizplus · Accepted Answer

The variance of a portfolio containing n assets with independent returns decreases as n increases, because as more assets are added to the portfolio, the diversification effect reduces the overall risk of the portfolio. Therefore, the variance decreases.

The Variance of a Portfolio Containing N Assets with Independent