A stock investor owns a diversified portfolio of 15 stocks.What will be the likely effect on portfolio standard deviation from adding one more stock?
A) A slight increase will occur.
B) A large increase will occur.
C) A slight decrease will occur.
D) A large decrease will occur.

Question

Quizplus · Accepted Answer

As the portfolio becomes more diversified, the risk of the portfolio may be reduced. The addition of one more stock to a portfolio may reduce portfolio standard deviation since the portfolio is more diversified. However, the decrease in the standard deviation may not be significant as the portfolio is already well-diversified with 15 stocks. Hence, a slight decrease in the portfolio standard deviation is likely to occur.

A Stock Investor Owns a Diversified Portfolio of 15 Stocks