A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation? A portfolio consisting of about 30 energy stocks. A portfolio containing only Chevron stock. A portfolio consisting of about 30 randomly selected stocks.
A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation? A portfolio consisting of about 30 energy stocks. A portfolio containing only Chevron stock. A portfolio consisting of about 30 randomly selected stocks.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 13QTD
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Question
5. Portfolio risk and diversification
A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation?
A portfolio consisting of about 30 energy stocks.
A portfolio containing only Chevron stock.
A portfolio consisting of about 30 randomly selected stocks.
Based on your understanding of portfolio risk, identify whether each statement is true or false.
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Statement
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True
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False
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|---|---|---|---|
| The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio. |
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|
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| A portfolio’s risk is not equal to the weighted average of the individual stocks’ standard deviations. |
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| When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. |
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| The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio. |
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