Portfolio managers pick stocks for their clients portfolios based on the investment objective of the client 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

A portfolios risk is likely to be smaller than the average of all stocks standard deviations, because diversification lowers the portfolios risk.

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

Portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.

The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio.