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's containing Microsoft, Apple, and Google stock

b.) A portfolio consisting of about three randomly selected stocks from different sectors.

c.) A portfolio containing only Microsoft stock.

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 of false.

Statement	True	False
The portfolio's risk is the weighted average of the individual stock's standard deviations.
Because of the effects of diversification, the portfolio's risk is likely to be smaller than the average of all stock's standard deviations.
Portfolio risk will decline if more stocks that are negatively correlated with other stocks are added to the portfolio.
The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio.

Answer 1

Solution-

b.) A portfolio consisting of about three randomly selected stocks from different sectors.

Explanation-

In portfolio there is 30 randomly selected stock consider in which 3 stock is related to different sectors a portfolio ​and 10 stock from the US and international stock markets.

Statement	True	False
The portfolio's risk is the weighted average of the individual stock's standard deviations.		False
Because of the effects of diversification, the portfolio's risk is likely to be smaller than the average of all stock's standard deviations.	True
Portfolio risk will decline if more stocks that are negatively correlated with other stocks are added to the portfolio.	True
The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio.		False