Every additional stock added to a portfolio reduces the portfolio's level of risk by an equal amount.

Question

Quizplus · Accepted Answer

The statement is false. The reduction in risk depends on the correlation of the added stock with the existing stocks in the portfolio. If the added stock is highly correlated with the existing stocks, then the risk reduction may be less significant. On the other hand, if the added stock has low correlation with the existing stocks, then the risk reduction may be more significant. Therefore, it is important to consider the correlation between stocks when building a diversified portfolio.

Every Additional Stock Added to a Portfolio Reduces the Portfolio's