A risky portfolio is one that:
I. is poorly diversified.
II. has a volatile stock in a basket of 200 stocks.
III. has a positive correlation between most of its stock prices.
A) I only
B) II and III only
C) I and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

A poorly diversified portfolio (I) is risky because it is not spreading the risk amongst different asset classes or sectors. A positive correlation between most of its stock prices (III) indicates that they may move in the same direction, therefore not providing enough diversification. However, just having one volatile stock in a basket of 200 (II) does not necessarily make the entire portfolio risky.

A Risky Portfolio Is One That