Which one of the following would tend to indicate that a portfolio is being effectively diversified?
A)A decrease in the portfolio standard deviation
B)An increase in the portfolio rate of return
C)An increase in the portfolio beta
D)An increase in the portfolio standard deviation
E)A constant portfolio beta

Question

Quizplus · Accepted Answer

A decrease in portfolio standard deviation indicates that the portfolio is being effectively diversified. Standard deviation measures the volatility of the portfolio and a decrease in it indicates a reduction in the risk of the portfolio. This reduction in risk can only be achieved by effective diversification. An increase in rate of return may or may not be indicative of effective diversification, while an increase in portfolio beta and standard deviation implies higher risk, which is not desirable. A constant portfolio beta doesn't give any indication of the effectiveness of diversification.

Which One of the Following Would Tend to Indicate That