Which of the following statements is correct?
A)A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
B)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.
C)A two-stock portfolio will always have a lower beta than a one-stock portfolio.
D)If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.

Question

Quizplus · Accepted Answer

Diversification is key to reducing risk in a portfolio. By having 40 stocks that are not highly correlated with the market, the portfolio is less likely to be impacted by market fluctuations. This is assuming that all the stocks have the same standard deviations. Option A and C are incorrect because the number of stocks in a portfolio and the beta calculation do not necessarily determine the standard deviation. Option D is incorrect because randomly selecting stocks does not guarantee a lower beta.

Which of the Following Statements Is Correct