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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
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 portfolio with randomly selected stocks from US and international markets
A portfolio with randomly selected international stocks
A portfolio with randomly selected US stocks
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, which of the following statements are true? Check all that apply.
A portfolio's risk is likely to be smaller than the average of all stocks' standard deviations, because diversification lowers the portfolio's
risk.
The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio.
Because of the effects of diversification, the portfolio's 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.
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