Question

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 A portfolio with 10 randomly selected international stocks. O A portfolio with 10 randomly selected stocks from U.S. and international markets. O 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 A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations. The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio. 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. The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio. O

Answer 1

1. A Portfolio with 10 randomly selected stocks from U.S and International markets.

- likely to have smallest standard deviation, Because this portfolio is more diversified than other two.

2.

True - A portfolio's risk is not equal to weighted average of the individual stock's standard deviation.

False - The market risk component .....................................reduced by radomly adding stocks to the portfolio.

True - When return of stock A increase, return on stock B also increase............................. are positively correlated.

False - The risk in portfolio will increase......................negatively correlated ..............added to the portfolio.

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