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

A portfolio containing Microsoft, Apple, and Google stock.

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 stocks contribution to portfolio risk and its statistical relationship with the portfolios 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.
A portfolios risk is not equal to the weighted average of the individual stocks standard deviations.
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.
The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.