Which of the following statements is CORRECTσ
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

Diversification can reduce the overall risk of a portfolio, but it depends on the correlation between the stocks in the portfolio. If the stocks are highly correlated with each other or with the overall market, diversification may not be as effective in reducing risk. Therefore, a portfolio consisting 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) False, the beta of a portfolio depends on the correlation between the stocks and their individual betas. 
C) False, the beta of a portfolio depends on the correlation between the stocks and their individual betas, not the number of stocks in the portfolio. 
D) False, a stock with an above-average standard deviation does not necessarily have an above-average beta. 
E) False, the standard deviation of a portfolio depends on the correlation between the stocks and their individual standard deviations.

Which of the Following Statements Is CORRECTσ