The incremental risk to a portfolio from adding another stock:
A)Is always greater than the average portfolio risk
B)Is always less than the average portfolio risk
C)Is always positive
D)Is often positive but can be negative

Question

Quizplus · Accepted Answer

The incremental risk to a portfolio from adding another stock can be positive or negative. If the added stock is highly correlated with the existing stocks in the portfolio, the incremental risk may be small or even negative. However, if the added stock has a significantly different risk and return profile than the existing stocks, the incremental risk may be positive. Therefore, option D is the correct answer.

The Incremental Risk to a Portfolio from Adding Another Stock