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?

a) A portfolio with 10 randomly selected U.S. stocks

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

c) A portfolio with 10 randomly selected international stocks

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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
The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio.
The portfolio’s risk is not the weighted average of the individual stocks’ standard deviations.
The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added 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.

Answer 1

A portfolio with 10 randomly selected stocks from U.S. and intemational markets Op tion B is correct S.No Statement True/Fals The market risk component of the total portfolio risk can be reduced byr The portfolio's risk is not the weighted average of the individual stocks' standard deviations The risk in a portfolio wil increase if more stocks that are FALSE adding stocks to the portfolio TRUE 3 negatively correlated with other stocks are added to the FALSE portfolio When returns on Stock A increase, returns on Stock B also 4 increase. In general, this would mean that Stocks A and B areTRUE ositively correlated.