As the number of individual stocks in a portfolio increases, the portfolio standard deviation:
A)increases at a constant rate.
B)remains unchanged.
C)decreases at a constant rate.
D)decreases at a diminishing rate.
E)decreases at an increasing rate.

Question

Quizplus · Accepted Answer

As the number of individual stocks in a portfolio increases, the portfolio standard deviation initially decreases at a diminishing rate because adding more stocks reduces the overall risk of the portfolio by diversification. However, eventually adding more stocks to the portfolio will have a diminishing impact on reducing the portfolio's risk as the portfolio becomes more diversified. Therefore, the rate of decrease in the portfolio standard deviation will decrease over time, resulting in a decreasing rate.

As the Number of Individual Stocks in a Portfolio Increases