The standard deviation of a portfolio will tend to increase when:
A)a risky asset in the portfolio is replaced with U.S.Treasury bills.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
C)the portfolio concentration in a single cyclical industry increases.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio increases when there is an increase in the concentration of a single cyclical industry as it exposes the portfolio to more systematic risk. The other choices will tend to decrease the standard deviation.

The Standard Deviation of a Portfolio Will Tend to Increase