**Portfolio Risk and Diversification: An Educational Overview**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 with 10 randomly selected U.S. stocks.- A portfolio with 10 randomly selected international stocks.- A portfolio with 10 randomly selected stocks from U.S. and international markets.**Portfolio Selection Criteria**Portfolio managers select stocks for their clients’ portfolios based on the investment objectives of the portfolio and various factors. A key consideration is each stock’s contribution to portfolio risk and its statistical relationship with the portfolio’s other stocks.**Assessing Portfolio Risk: True or False Statements**Based on your understanding of portfolio risk, determine whether each statement below is true or false.| Statement | True | False ||-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------|-------|| A portfolio’s risk is likely to be smaller than the average of all stocks’ standard deviations, because diversification lowers the portfolio’s risk. | | || Because of the effects of diversification, the portfolio’s risk is likely to be more than the average of all stocks’ standard deviations. | | || Portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio. | | || The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio. | | |

Standard deviation as a risk measure indicates how risky the portfolio is. A higher standard deviation indicates higher portfolio risk while a lower standard deviation indicates lower portfolio risk. Diversification refers to inclusion of different assets, stocks to a portfolio to reduce overall portfolio risk. Its like diversifying your risk across the different assets or stocks. One of the many diversification strategies used by portfolio managers are inclusion of stocks/assets with little or not correlation. When one adds stocks or assets with little or no correlation in the portfolio it reduces portfolio risk as the loss in one asset may not reflect in the other.A portfolio consisting of US Stocks only has exposure to stocks of that country only and any country specific risk may impact all of the stocks. These stocks may have a co-movement or may be positively correlated. A portfolio consisting of international stocks only may have stocks positively correlated to each other and this may not reduce portfolio risk very efficiently. A portfolio consisting of US stocks and international stocks will be efficient in reducing portfolio risk as international stocks and US stocks may not share a very strong relationship in terms of correlation. This also reduces overall portfolio risk and standard deviation will be least in this case. Hence the third option is correct. True and False: This statement is true as diversification reduces portfolio risk. Portfolio risk is measured by standard deviation and withimplementation of diversification, the standard deviationof the portfolio will be less than the average standard deviation of stocks. This statement is false as diversification will lead to a reduced standard deviation/reduced portfolio risk. This statement is false as negatively correlated stocks help immunize a portfolio against risk. Stocks that move in opposite directions are not affected at the same time and that works in portfolio risk reduction. This statement is true. Unsystematic risk can be brought down byadding negatively correlated stocks to the portfolio.

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A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to deviation? OA portfolio with 10 randomly selected U.S. stocks. OA portfolio with 10 randomly selected international stocks. OA portfolio with 10 randomly selected stocks from U.S. and international markets. Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors. One key consideration is each stock's contribution to portfolio risk and its statistical relationship with the portfolio's other stocks. Based on your understanding of portfolio risk, identify whether each statement is true or false. Statement A portfolio's risk is likely to be smaller than the average of all stocks' standard deviations, because diversification lowers the portfolio's risk. cks' standard True False O

A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to deviation? OA portfolio with 10 randomly selected U.S. stocks. OA portfolio with 10 randomly selected international stocks. OA portfolio with 10 randomly selected stocks from U.S. and international markets. Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors. One key consideration is each stock's contribution to portfolio risk and its statistical relationship with the portfolio's other stocks. Based on your understanding of portfolio risk, identify whether each statement is true or false. Statement A portfolio's risk is likely to be smaller than the average of all stocks' standard deviations, because diversification lowers the portfolio's risk. cks' standard True False O

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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Consider an environment of 40 individual risky securities and one risk free asset. One investoris selecting between the Markowitz mean-variance frontier framework and the index model inthe portfolio analysis. Answer the following questions: (a) How many parameters are used as the input to construct the mean-variance frontier (b) How many inputs are used for the index model? calculate aswell
If a stock portfolio is well-diversified, then the portfolio variance Group of answer choices -will be a weighted average of the variances of the individual securities in the portfolio. -will equal the variance of the most volatile stock in the portfolio. -must be equal to or greater than the variance of the least risky stock in the portfolio. -may be less than the variance of the most volatile stock in the portfolio. -will be an arithmetic average of the variances of the individual securities in the portfolio.
Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks? a. The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. b. The beta of the portfolio is less than the average of the betas of the individual stocks. c. The beta of the portfolio is equal to the average of the betas of the individual stocks. d. The beta of the portfolio is larger than the average of the betas of the individual stocks. e. The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.
After learning the course, you divide your portfolio into three equal parts (i.e., equal market value weights), with one part in Treasury bills, one part in a market index, and one part in a mutual fund with beta of 1.11. What is the beta of your overall portfolio?
After learning the course, you divide your portfolio into three equal parts (i.e., equal market value weights), with one part in Treasury bills, one part in a market index, and one part in a mutual fund with beta of 0.77. What is the beta of your overall portfolio?
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Suppose we form a portfolio invested in Mercedes and BMW stocks. The two stocks are equally weighted in the portfolio. The table below displays each stock’s mean return, variance, and standard deviation, as well as their covariance. Estimate the mean and variance of this portfolio, as well as its standard deviation. Show in detail your Asset returns Mercedes BMW Mean return 1.78% -0.48% Variance 0.0456 0.0276 Standard deviation 21.35% 16.61% Covariance 0.0020
Investors can use certain metrics to assess a stock or stock portfolio's risk. One of them is the Sortino ratio. What is this ratio and what is unique in its measurement?
Consider two portfolios, Portfolio A and Portfolio B, with the following performance metrics: - Portfolio A has a Sharpe Ratio of 0.8, a Treynor Ratio of 1.2, and a Jensen's Alpha of 0.5. - Portfolio B has a Sharpe Ratio of 1.2, a Treynor Ratio of 0.9, and a Jensen's Alpha of -0.2. Which of the following statements is correct regarding the performance of these portfolios? Portfolio A has a higher risk-adjusted return when the risk is measured by the beta. Portfolio B outperforms the risk-adjusted return suggested by CAPM. Portfolio A and B have similar risk-adjusted returns, but Portfolio B exhibits negative abnormal returns. Portfolio B has a higher risk-adjusted return when the risk is measured by the standard deviation. Portfolio A outperforms Portfolio B in terms of both risk-adjusted return and abnormal returns suggested by CAPM.
please this part of the question ASAP too What is the standard deviation of the rate of return on your client's portfolio? (Round your intermediate calculations and final answer to 1 decimal place.)
The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020, Use the data to answer the questions that follow. a. On the basis of a review of the return data, which investment appears to be more risky? Why? b. Calculate the standard deviation for each investment's returns. c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation in part a. a. On the basis of a review of the return data, which investment appears to be more risky? Why? (Choose the best answer below.) A. The riskier investment appears to be investment B, with returns that vary widely from the average relative to investment A, whose returns show less deviation from the average. B. Investment A and investment B have equal risk because the average returns are the same. C. The riskier investment appears to be investment A, with returns that vary widely from the average relative to investment B, whose…
A portfolio analyst has been asked to allocate investment funds among three different stocks. The relevant data for the stocks is shown in the following table. If the goal is to maximize return while maintaining risk within acceptable bounds (in this case, a portfolio standard deviation of no more than 20%), find the proper allocation of the funds to each stock. Return Risk (Standard Deviation Stock (R) A 20% to S) 25% Pair of Stocks Joint Risk (Covariance) A to B 0.05 B 10% 12% A to C 0.075 C 15% 10% B to C -0.05 ces What proportion of the portfolio should be allocated to stock]B?

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