Which of the following statements is CORRECT?
A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio.
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
D) A stock with an above-average standard deviation must also have an above-average beta.
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

Question

Quizplus · Accepted Answer

The statement in option A is correct because diversification helps to reduce risk, and having stocks that are not highly correlated with the market further reduces risk. The standard deviation of the stocks in a portfolio does not determine the portfolio's risk level, but rather the level of correlation between the stocks.

Which of the Following Statements Is CORRECT