The standard deviation of a portfolio will tend to increase when
A)the portfolio concentration in a single cyclical industry increases.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to any other stock in the portfolio.
C)a risky asset in the portfolio is replaced with U.S.Treasury bills.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.

Question

Quizplus · Accepted Answer

When the portfolio concentration in a single cyclical industry increases, the portfolio becomes less diversified, and the overall risk of the portfolio increases. This increase in risk will result in an increase in the standard deviation of the portfolio.

The Standard Deviation of a Portfolio Will Tend to Increase