The standard deviation of a portfolio will tend to increase when
A)the portfolio concentration in a single cyclical industry increases.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to any other stock in the portfolio.
C)a risky asset in the portfolio is replaced with U.S.Treasury bills.
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 concentration of a portfolio in a single cyclical industry increases its exposure to systematic risk factors, such as macroeconomic variables that affect the entire industry. In turn, the portfolio's standard deviation increases because its return is more sensitive to external systematic shocks.

The Standard Deviation of a Portfolio Will Tend to Increase