Bob holds a portfolio of 20 stocks from different industries, whereas Sharon holds only one stock in her portfolio. Assuming they each add a stock to their portfolio, which of the following is most likely? Relative to Bob's portfolio, Sharon's portfolio will experience the:
A) larger increase in total risk.
B) larger increase in return.
C) larger decrease in total risk.
D) larger decrease in market risk.

Question

Quizplus · Accepted Answer

Sharon's portfolio, which initially consists of only one stock, will experience a larger decrease in total risk when a second stock is added due to diversification benefits. Bob's portfolio is already diversified with 20 stocks, so adding one more stock will have a minimal impact on reducing total risk.

Bob Holds a Portfolio of 20 Stocks from Different Industries