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 if the new stock is highly correlated with the existing stocks in the portfolio, adding diversification benefit. However, if the new stock is poorly correlated with the existing stocks, it may increase the portfolio's risk, making the incremental risk negative. Therefore, option D is the best choice as it acknowledges that the incremental risk can be both positive and negative.

The Incremental Risk to a Portfolio from Adding Another Stock