When shares with the same expected return are combined into a portfolio:
A)the expected return of the portfolio is less than the weighted average expected return of the shares.
B)the expected return of the portfolio is greater than the weighted average expected return of the shares.
C)the expected return of the portfolio is equal to the weighted average expected return of the shares.
D)there is no relationship between the expected return of the portfolio and the expected return of the shares.
E)None of the above.

Question

Quizplus · Accepted Answer

According to the principle of diversification, combining shares with the same expected return in a portfolio results in a reduction of risk. However, the expected return of the portfolio is the weighted average of each share's expected return, where the weights are the proportion of the portfolio invested in each share. Therefore, the expected return of the portfolio is equal to the weighted average expected return of the shares.

When Shares with the Same Expected Return Are Combined into a Portfolio