Diversification Ratio

What is the primary purpose of the diversification ratio?

• To measure the overall return of a portfolio.

• To quantify the risk reduction benefits from diversification.

• To determine the market capitalization of a company.

• To calculate the liquidity of assets in a portfolio.

Which formula correctly represents the Diversification Ratio?

• Portfolio Standard Deviation × (Sum of Asset Weights + Individual Asset Standard Deviations)

• Portfolio Standard Deviation / (Sum of Asset Weights × Individual Asset Standard Deviations)

• (Sum of Asset Weights × Individual Asset Standard Deviations) / Portfolio Standard Deviation

• Portfolio Return / Portfolio Standard Deviation

What does a lower diversification ratio indicate?

• Higher overall portfolio risk.

• Less diversification benefits.

• Greater diversification benefits and lower overall portfolio risk.

• No change in portfolio risk.

Which of the following is NOT a factor affecting the Diversification Ratio?

• Asset Correlations

• Number of Assets

• Market Liquidity

• Asset Weights