Expert advice on Diversification Please!!! 4. Diversification Aa Aa A financial

Question

Expert advice on Diversification Please!!!

4. Diversification Aa Aa A financial planner is examining the portfolios held by several of her clients. The portfolios are described below Identify which portfolio is likely to have the smallest standard deviation. O A portfolio consisting of about 3 randomly selected stocks O A portfolio consisting of about 30 technology stocks O A portfolio containing Microsoft, Apple Computer, and Google O A portfolio containing only Microsoft stock O A portfolio consisting of about 30 randomly selected stocks

Explanation / Answer

Correct answer is a portfolio consisting of only about 30 randomlly selected stocks

It has great chances of risk in single stock of company specific risk. As we will add more stocks, it will help in reducing the risk of the portfolio.

Diversification benefits are maximum when the stocks in the portfolio are not correlated.

As random stocks will be selected, it will increase the chance of diversification as stocks from various sectors will be selected.

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