True or False: Increasing the number of stocks in a portfolio reduces market risk.
A) True
B) False
Consider two stock portfolios. Portfolio A consists of four different stocks from firms in different industries. Portfolio B consists of 10 different stocks, also from firms in different industries. The return on Portfolio A is likely to be 1) ________ (MORE or LESS) volatile than that of Portfolio B.
Suppose a stock analyst recommends buying stock in the following companies:
| Company | Industry |
|---|---|
| Toyonda | Automotive |
| Saalvo | Automotive |
| GMW | Automotive |
| Honsubishi | Automotive |
| Shexxon | Oil and gas |
| Mobron | Oil and gas |
| Airing | Aircraft |
| Boebus | Aircraft |
| Goohoo | Technology |
| Pherk | Pharmaceutica |
2) Each of the following portfolios contains four of the stock picks. Which portfolio is the least diversified?
A) Toyonda, Honsubishi, Boebus, Airing
B) Boebus, Airing, Shexxon, Mobron
C) Pherk, Airing, Goohoo, Shexxon
D) Toyonda, Saalvo, GMW, Honsubishi
\(1 .\)
\(\underline{\text { B) }}\) False (It just spreads risk, does not reduce it)
2
Consider two stock portfolios. Portfolio A consists of four different stocks from firms in different industries. Portfolio B consists of 10 different stocks, also from firms in different industries. The return on Portfolio \(\mathrm{A}\) is likely to be \(\underline{\text { MORE }}\) volatile than that of Portfolio \(\mathrm{B}\).
\(3 .\)
D) Toyonda, Saalvo, GMW, Honsubishi
Option A : Toyonda, Honsubishi, Boebus, Airing: In this 2 are from Automotive(Toyonda, Honsubishi) while 2 are from Aircraft Industry (Boebus, Airing). Hence this option is diversified in 2 industry.
Option B : Boebus, Airing, Shexxon, Mobron: In this 2 are from Oil and Gas (Shexxon, Mobron) while 2 are from Aircraft Industry (Boebus, Airing). Hence this option is diversified in 2 industry.
Option C : Pherk, Airing, Goohoo, Shexxon: Pherk is from Pharmaceutical, Airing is from Aircraft, Goohoo is technology and Shexxon is from Oil and Gas industry. Hence this option is diversified in 4 industry.
Option D : Toyonda, Saalvo, GMW, Honsubishi. All four are from Automotive industry. Hence this option is least diversified.
True or False: Increasing the number of stocks in a portfolio reduces market risk. A) True...