Chapter 7, Problem 4PS

Portfolio risk True or false?

1. a. Investors prefer diversified companies because they are less risky.
2. b. If stocks were perfectly positively correlated, diversification would not reduce risk.
3. c. Diversification over a large number of assets completely eliminates risk.
4. d. Diversification works only when assets are uncorrelated.
5. e. A stock with a low standard deviation always contributes less to portfolio risk than a stock with a higher standard deviation.
6. f. The contribution of a stock to the risk of a well-diversified portfolio depends on its market risk.
7. g. A well-diversified portfolio with a beta of 2.0 is twice as risky as the market portfolio.
8. h. An undiversified portfolio with a beta of 2.0 is less than twice as risky as the market portfolio.