As the number of stocks in a portfolio increases, the portfolio standard deviation
A) Increases at a diminishing rate
B) Increases at an increasing rate
C) Decreases at a diminishing rate
D) Remains unchanged
E) Decreases at an increasing rate

Question

Quizplus · Accepted Answer

As the number of stocks in a portfolio increases, the overall risk (measured by standard deviation) of the portfolio tends to decrease due to diversification. However, the rate of decrease diminishes as more stocks are added because the unique risk of each additional stock has less impact on the total portfolio risk.

As the Number of Stocks in a Portfolio Increases, the Portfolio