As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ________.
A) increases
B) remains unchanged
C) decreases
D) doubles

Question

Quizplus · Accepted Answer

As we increase the number of stocks in a portfolio, the diversification effect will help to decrease the standard deviation of returns of the portfolio. This is because the unsystematic risk of each stock will be diversified away, leaving only the systematic risk which affects the whole market. Therefore, the portfolio standard deviation will decrease.

As We Increase the Number of Stocks in a Portfolio