Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock po...
Diversification and risk
The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market.
014102030406040200RISK (Standard deviation of portfolio return)NUMBER OF STOCKS IN PORTFOLIO
True or False: Increasing the number of stocks in a portfolio reduces market risk.
True
False
Consider two stock portfolios. Portfolio A consists of 20 different stocks from firms in different industries. Portfolio B consists of 10 different stocks, also from firms in different industries. The return on Portfolio A is likely to be volatile than that of Portfolio B.
Suppose a stock analyst recommends buying stock in the following companies:
|
Company |
Industry |
|---|---|
| Toyonda | Automotive |
| Saalvo | Automotive |
| GMW | Automotive |
| Honsubishi | Automotive |
| Shexxon | Oil and gas |
| Mobron | Oil and gas |
| Airing | Aircraft |
| Boebus | Aircraft |
| Goohoo | Technology |
| Pherk | Pharmaceutical |
Each of the following portfolios contains four of the stock picks. Which portfolio is the most diversified?
Boebus, Airing, Shexxon, Mobron
Toyonda, Honsubishi, Boebus, Airing
Pherk, Toyonda, Goohoo, Shexxon
Toyonda, Saalvo, GMW, Honsubishi
Homework Answers
(1) False
Increasing number of stocks increases diversification, which reduces firm-specific risks but not market risk.
(2) The return on Portfolio A is likely to be Less volatile than that of Portfolio B.
(The higher the number of diversified stocks, the lower the volatility).
(3) Pherk, Toyonda, Goohoo, Shexxon
Since all four stocks are from different industries, this portfolio has maximum diversification.
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Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock po...
The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's...
The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. + Hur RISK (Standard deviation of portfolio return) 111 01 4 10 2030 NUMBER OF STOCKS IN PORTFOLIO True or False: Increasing the number of stocks in a portfolio reduces market risk. True False Consider two stock portfolios. Portfolio A consists of 20 different stocks from firms in different...
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pricing model (CAPM) explains how risk should be considered when
stocks and other assets are held . The CAPM states that any stock's
required rate of return is the risk-free rate of return plus a risk
premium that reflects only the risk remaining diversification. Most
individuals hold stocks in portfolios. The risk of a stock held in...
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6. 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 consisting of about 30 randomly selected stocks A portfolio containing only Chevron stock A portfolio consisting of about 30 energy 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...
Statement True False Because of the effects of diversification, the portfolio's risk is likely to be more than the average of all stocks' standard deviations. The unsystematic risk com ponent of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio. A portfolio's risk is likely to be smaller than the everage of all stocks' standard deviations, because diversification lowers the portfolio's risk. Portfolio risk will increase if more stocks that are negatively correlated with...
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3. Portfolio risk and diversification Aa Aa E 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? O O O A portfolio containing only Chevron stock A portfolio consisting of about 30 energy stocks 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....
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2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk
and Rates of Return: Risk in Portfolio Context The capital asset
pricing model (CAPM) explains how risk should be considered when
stocks and other assets are held . The CAPM states that any stock's
required rate of return is the risk-free rate of return plus a risk
premium that reflects only the risk remaining diversification. Most
individuals hold stocks in portfolios. The risk of a stock held in...
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