As more stocks are added onto a portfolio, portfolio risk declines only to a point where no matter how many stocks you own, and even if you own all the stocks available in the market; you will find yourself unable to diversify away any more risk. Explain how and why that may be so.
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As more stocks are added onto a portfolio, portfolio risk declines only to a point where no matter how many stocks you own, and even if you own all the stocks available in the market; you will find yourself unable to diversify away any more risk. Explain how and why that may be so.
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- Which of the following statements is CORRECT? a. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. b. An investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks. c. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount. d. An investor can eliminate almost all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks. e. An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.Which is true with regards to the systematic and unsystematic risk? To mitigate the unsystematic risk, an investor must choose two stocks that has a perfectly negative correlation when establishing ones portfolio of securities A portfolio with stocks that has high Sharpe ratios does not have both unsystematic and systematic risk because then generate excess returns The likes of inflation, recession, changes in interest rates are examples of market risk that can be reduced to zero by a portfolio that is fully diversified Systematic risk can be diversified by choosing stocks that has a small standard deviation but high correlation coefficient since these stocks are less riskierWhich of the following statements is CORRECT? a. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. b. The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. c. Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio. d. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. e. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
- Give typing answer with explanation and conclusion Which of the following statements is CORRECT? a. An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks. b. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. c. It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock. d. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount. e. An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.An asset manager and he is overweight in equities because he believes that equities have more upside in the long run. However, he is worried that any negative news regarding COVID-19 may cause a short-term sell off in the stock markets. What kind of strategy would you recommend for him to partially hedge his portfolio and why and what are the advantages and disadvantages of the recommended strategy?When all investors have the same information and care only about expected return and volatility; if new information arrives about one stock, can this information affect the price and return of other stocks?
- Which statement about portfolio diversification is correct?a. Proper diversification can reduce or eliminate systematic risk.b. Diversification reduces the portfolio’s expected return because it reduces a portfolio’s total risk.c. As more securities are added to a portfolio, total risk typically can be expected to fall at a decreasing rate.d. The risk-reducing benefits of diversification do not occur meaningfully until at least 30 individual securities are included in the portfolio.Is there any portfolio that can be constructed with stocks 1, 2, and risk-free security that will make him better off? What is it? Assume that no short-selling of stocks is allowed. You do not need to find the best portfolio, just a better portfolio. And can you please explain why your portfolio is strictly better than stock 1 alone? Thank you!When adding a randomly chosen new stock to an existing portfolio, the lesser (or more negative) the degree of correlation between the new stock and stocks already in the portfolio, the more the additional stock will increase the portfolio's risk. When adding a randomly chosen new stock to an existing portfolio, the lesser (or more negative) the degree of correlation between the new stock and stocks already in the portfolio, the more the additional stock will increase the portfolio's risk. True or False
- Given that higher-risk investments, such as small-company stocks, have outperformed other investments over time, why don’t all investors choose to invest only in these high-risk securities? (Answer the question correctly and in-depth.)which of the following is FALSE regarding portfolio diversification and risk? Market risk is also known as systematic risk Through diversification, systematic risk can be eliminated. Diversification can reduce risk without an equivalent reduction in expected return Firm specific risk is also known as unsystematic risk Forming a well-diversified portfolio can eliminate about half the risk associated with owning a single stockNo matter how the stock price fluctuates, as long as it can provide a positive return, the risk of investing in stocks is low.If the concept of standard deviation is applied, is this true or false?
