7. Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. 8 RISK (Standard deviation of portfolio return) 8 O 01 4 True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. True 30 NUMBER OF STOCKS IN PORTFOLIO False ?
7. Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. 8 RISK (Standard deviation of portfolio return) 8 O 01 4 True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. True 30 NUMBER OF STOCKS IN PORTFOLIO False ?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7. Diversification and risk
The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the
portfolio for a hypothetical stock market.
RISK (Standard deviation of portfolio return)
60
20
01 4
True
10
20
30
NUMBER OF STOCKS IN PORTFOLIO
True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk.
False
40
?
Transcribed Image Text:True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk.
True
False
Consider two stock portfolios. Portfolio Y consists of four different stocks from firms in different industries. Portfolio X consists of 20 different stocks, also
from firms in different industries. The return on Portfolio Y is likely to be volatile than that of Portfolio X.
Suppose a stock analyst recommends buying stock in the following companies:
Company
Toyonda
Saalvo
GMW
Honsubishi
Shexxon
Mobron
Airing
Boebus
Goohoo
Pherk
Industry
Automotive
Automotive
Automotive
Automotive
Oil and gas
Oil and gas
Aircraft
Aircraft
Technology
Pharmaceutical
Each of the following portfolios contains four of the stock picks. Which portfolio is the most diversified?
Toyonda, Honsubishi, Boebus, Airing
cPherk, Toyonda, Goohoo, Shexxon
Boebus, Airing, Shexxon, Mobron
Toyonda, Saalvo, GMW, Honsubishi
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