Question

The standard deviation of a portfolio will tend to increase when:

		A. a risky asset in the portfolio is replaced with U.S. Treasury bills.
		B. one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
		C. the portfolio concentration in a single cyclical industry increases.
		D. the weights of the various diverse securities become more evenly distributed.
		E. short-term bonds are replaced with Treasury Bills.

Answer 1

A: Replacing Risky asset with risk-free asset (SD = 0) causes to decrease standard deviation of the portfolio

B: If it is replaced with unrelated stock, it can’t be predicted and can be lower or higher.

C: Portfolio Concentration is related to idiosyncratic (non-market) risk taken on by an ETF. High concentration increases risk. This is the right answer.

D: If now weights are evenly distributed, SD can be lower or higher.

E: same as A