Question

The following graph plots portfolio risk against the size of the portfolio as measured by the number of stocks in the portfolio. (Hint: Hover the mouse over the graph to read the coordinates.) PORTFOLIO RISK 0 15 30 45 60 75 90 105 120 135 150 NUMBER OF STOCKS IN THE PORTFOLIO Based on the data presented in the previous graph, which of the following statements are true? Check all that apply. A portfolio of 60 stocks has a diversifiable risk of 4%. As the portfolio's size increases, its market risk decreases. tfolio of 120 or more stocks could eliminate almost half of the risk. The market portfolio would have a standard deviation of about 20%. The market portfolio would have a standard deviation of 10%.

Answer 1

Q - Part 1 - Statement 2 and 3 are true. For the rest you do not have sufficient information to prove that it is true.

2 - As portfolio size increases, market risk decreases

3 - A portfolio of 120 stocks or more could eliminate almost half the risk

Q - Part 2 - Statement 3 - Stock with high correlation with market is risky since it fluctuates based on market movement. Low correlated stocks provide the balancing act an provides hedging cushion to the portfolio.