Answered: Which of the following portfolios is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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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 with 10 randomly selected international stocks.

A portfolio with 10 randomly selected stocks from U.S. and international markets.

A portfolio with 10 randomly selected U.S. 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, identify whether each statement 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.

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