1) Which of the following statements is most correct concerning diversification

ID: 2645307 • Letter: 1

Question

1) Which of the following statements is most correct concerning diversification and risk?

a) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.

b) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.

c) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.

d) Asset allocation is important for pension funds but not for individual investors.

2) Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.

True or False

3) State of the Economy Probability Stock W

Explanation / Answer

1) c) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.

2) True

3) 72+15+16+35+85=223/5= 44.6

Now Deviation from the Mean and their square:

27.4

750.76

-29.6

876.16

-28.6

817.96

-9.6

92.16

40.4

1632.16

4169.2

SD= Square root of 4169.2/5= 833.84= 28.87%

ie. d) 29%