Which one of the following will necessarily decrease the risk of a portfolio that consists of stocks, Treasury bills, and gold?
A) Decreasing the number of securities in the portfolio.
B) Selling stocks and replacing them with Treasury bills.
C) Selling a .90 beta stock and buying a 1.1 beta stock.
D) Selling the gold and buying more diversiﬁed stocks.
E) Selling the large-company stocks and buying small-company stocks.

Question

Quizplus · Accepted Answer

Treasury bills are considered to be a risk-free asset, so increasing their allocation in a portfolio will decrease the overall risk of the portfolio. Selling stocks and replacing them with Treasury bills will also decrease the portfolio's exposure to the stock market, further reducing risk. Selling a .90 beta stock and buying a 1.1 beta stock will actually increase the portfolio's risk. Selling the gold and buying more diversified stocks may or may not decrease risk depending on the specific stocks chosen. Selling the large-company stocks and buying small-company stocks may increase risk as small-company stocks are considered more volatile than large-company stocks. Decreasing the number of securities in the portfolio may or may not decrease risk, depending on the specific securities removed.

Which One of the Following Will Necessarily Decrease the Risk