3. Consider two diversified stock portfolios. One contains 500 stocks, the other

Question

3. Consider two diversified stock portfolios. One contains 500 stocks, the other 25 stocks. How would you describe the relative risk (standard deviation) of these two portfolios? SD25 standard deviation of the 25-stock portfolio SDs00 standard deviation of the 500-stock portfolio a. SD2s is much less than SD$00 b. SD2s is about equal to SDs00 c. SD2s is much greater than SDso0 (measured by standard deviation) to their stock portfolios? Why or why not? 4. Should particularly risk-averse investors ever consider adding high-risk stock 5. "Wise investors should minimize the risk of their portfolios." Do you agree 6. The primary benefit of common-stock mutual funds is that they offer an in- 7. Explain why a portfolio's standard deviation is not the weighted average of or disagree? expensive and convenient means of achieving the portfolio effect. Do youp agree or disagree the stocks' standard deviations. Can you think of any instance where portfo- lio standard deviation equals the average stock standard deviation? 8. All else being equal, the lower the correlation between stocks, the lower the nortfalio standard devintion Ir seems obvious therefore that von should

Explanation / Answer

Answer5

Yes, I agree because large number of investments are available in the market. Wise investors are those investors who invest in different kind of securities which gives maximum return at given risk or minimum risk at a given return.

Wise investors follows diversification to minimise the risk of portfolio. Diversification is broadly defined as a technique that reduces risks by allocating investments among various financial instruments, industries and other categories. Think of it as putting your eggs in different baskets, where each basket reacts differently to a given situation.

Benefits of diversification for wise investors

1. Minimising risk of loss – if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.

2. Generating returns – sometimes investments don’t always perform as expected, by diversifying you’re not merely relying upon one source for income.

Wise investors always work to minimise the risk of portfolio. Effiecient portfolio frontier also help investors to find out efficient portfolios to reduce their risk.

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