Asked by Grant Burry on Jul 09, 2024
Verified
If a stock portfolio is well diversified, then the portfolio variance:
A) Will equal the variance of the most volatile stock in the portfolio.
B) May be less than the variance of the least risky stock in the portfolio.
C) Must be equal to or greater than the variance of the least risky stock in the portfolio.
D) Will be a weighted average of the variances of the individual securities in the portfolio.
E) Will be an arithmetic average of the variance of the individual securities in the portfolio.
Volatile Stock
Shares of a company that exhibit significant fluctuations in price over short periods of time due to various factors.
Risky Stock
Shares of a company with a high level of risk, often due to volatility, uncertainty, or both, potentially leading to high returns or losses.
- Recognize the importance of the correlation between stocks in a portfolio and its effect on portfolio variance.
Verified Answer
SD
Sarah DykstraJul 16, 2024
Final Answer :
B
Explanation :
Diversification can reduce the overall risk of a portfolio to a level that is lower than the risk of the least risky stock in the portfolio, due to the benefits of combining uncorrelated or negatively correlated assets.
Learning Objectives
- Recognize the importance of the correlation between stocks in a portfolio and its effect on portfolio variance.