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

A. The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio.
B. A portfolio’s risk is likely to be smaller than the average of all stocks’ standard deviations, because diversification lowers the portfolio’s risk.
C. Portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.
D. Because of the effects of diversifications, the portfolio's risk is likely to be more than the average of all stocks standard deviations

Question

09-03-2020
Business

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

A. The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio.
B. A portfolio’s risk is likely to be smaller than the average of all stocks’ standard deviations, because diversification lowers the portfolio’s risk.
C. Portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.
D. Because of the effects of diversifications, the portfolio's risk is likely to be more than the average of all stocks standard deviations

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annyksl annyksl · Answer 1 · 2020-03-12T07:52:52+01:00

Answer:

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

Explanation:

Portfolio risk is a term used to describe which chances of combining assets or units fail to meet the objectives you had when you established some type of investment. The greater the economic return that an investment offers, the greater the portfolio risk will be and more losses may be presented.

However, the portfolio risk can be reduced in high-risk investments, if a diversification of incest combinations is established that does not depend on just one factor, to be successful. However, due to the effects of diversification, the portfolio's risk is likely to be higher than the average of the standard deviations of all stocks. In this case, the risk of a portfolio is likely to be less than the average of the standard deviations of all stocks, because diversification reduces the risk of the portfolio.