13. Portfolio risk (S7.3–S7.4) True or false?

a. Investors prefer diversified companies because they are less risky.

b. If stocks were perfectly positively correlated, diversification would not reduce risk.

c. Diversification over a large number of assets completely eliminates risk.

d. Diversification works only when assets are uncorrelated.

e. Diversification reduces systematic risk.

2010 2011 2012 2013 2014 Ms. Sauros +24.9 –0.9 +18.6 +42.1 +15.2 S&P 500 +17.2 +1.0 +16.1 +33.1 +12.7 Chapter 7 Introduction to Risk, Diversification, and Portfolio Selection 215

f. A stock with a low standard deviation always contributes less to portfolio risk than a stock with a higher standard deviation.

g. The contribution of a stock to the risk of a well-diversified portfolio depends on its market risk.

Note: Correlations and standard deviations were calculated using returns in each country’s own currency. In other words, they assume that the investor is protected against exchange risk.

BHP Billiton BP Siemens Nestlé Sony Sanofi Agricultural Bank BHP Billiton 1.00 0.44 0.21 −0.05 0.21 0.15 0.24 BP 1.00 0.40 0.24 0.27 0.36 0.27 Siemens 1.00 0.26 0.33 0.29 0.21 Nestlé 1.00 0.34 0.27 −0.06 Sony 1.00 0.27 0.35 Sanofi 1.00 0.17 Agricultural Bank 1.00 Standard deviation, % 26.1 22.8 22.5 13.6 27.6 17.5 25.5

⟩ TABLE 7.6 Standard deviations of returns and correlation coefficients for a sample of seven stocks