Answered: A financial planner is examining the…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 4MC: You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the...

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Question

A financial planner is examining the portfolios held by several of her clients. Identify 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

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, which of the following statements are true? Check all that apply.

The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.

The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio.

The portfolio’s risk is not the weighted average of the individual stocks’ standard deviations.

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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