6. Portfolio risk and diversification

A financial planner is examining the portfolios held by several of her clients. Identify which of the following portfolios is likely to have the smallest standard deviation:

A. A portfolio with 10 randomly selected international stocks

B. A portfolio with 10 randomly selected U.S. stocks

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

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 stocks contribution to portfolio risk and its statistical relationship with the portfolios other stocks. Based on your understanding of portfolio risk, which of the following statements are true? Check all that apply.

( ) 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.

( )The portfolios risk is the weighted average of the individual stocks standard deviations.

( )Because of the effects of diversification, the portfolios risk is likely to be smaller than the average of all stocks standard deviations.