How does the diversification of an investor\'s portfolio avoid risk? A. If an in

Question

How does the diversification of an investor's portfolio avoid risk?

A.

If an investor buys stocks that are positively correlated, as the number of stocks held increases, the overall variance of the portfolio increases.

B.

If an investor buys stocks that are positively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.

C.

If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio increases.

D.

If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.

Explanation / Answer

If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.

When returns from stock portfolio are not highly correlated with the index, the portfolio will not see as much downside as the index and this decreases volatility and, in turn, the risk.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.