Which of the following statements best describes what would be expected to happe

Question

Which of the following statements best describes what would be expected to happen as you randomly add stocks to your portfolio? A. Adding more stocks to your portfolio reduces the portfolio’s company-specific risk. B. Adding more stocks to your portfolio reduces the beta of your portfolio. C. Adding more stocks to your portfolio increases the portfolio’s expected return. D. Adding more stocks to your portfolio increases the portfolio’s overall risk. E. Adding more stocks to your portfolio increases the portfolio’s systematic risk.

Explanation / Answer

Option A is correct

Stocks in a portfolio belong to different groups of companies and industries. So adding more stocks will diversify the portfolio and hence it will lower the risk of the portfolio. We cannot tell about the returns as it depends on the weight provided to that particular stock and its return. But surely, it will help in diversification.

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