An investor may reduce risk by selecting
A) high beta stocks
B) stocks with poorly correlated returns
C) a cross‑section of firms in the same industry
D) stocks traded on organized exchanges

Question

An investor may reduce risk by selecting​
A) ​high beta stocks
B) ​stocks with poorly correlated returns
C) ​a cross‑section of firms in the same industry
D) ​stocks traded on organized exchanges

Quizplus · Accepted Answer

A key way to reduce risk in a portfolio is to select stocks with poorly correlated returns. This means choosing stocks that don't tend to move in the same direction at the same time, so that if one stock is performing poorly, the others may still be performing well. This can help to smooth out the overall returns of the portfolio and reduce overall risk. Choosing high beta stocks, which tend to be more volatile, and choosing a cross-section of firms in the same industry, which may all be affected by similar market conditions, do not necessarily help to reduce risk. Choosing stocks traded on organized exchanges is not relevant to reducing risk.

An Investor May Reduce Risk by Selecting​

An Investor May Reduce Risk by Selecting