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13 December, 09:17

A financial planner is examining the portfolios held by several of her clients. Identify which of the following portfolios is likely to have the smallest standard deviation: A portfolio consisting of about 30 randomly selected stocks A portfolio containing only Chevron stock A portfolio consisting of about 30 energy stocks

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  1. 13 December, 11:15
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    Answer: A portfolio containing 30 randomly selected stocks will have the smallest standard deviation.

    Explanation:

    A portfolio containing 30 randomly selected stocks tend to have a lesser covariance between the security returns. Also, there will be increased diversification. This increased diversification lowers the risk of portfolio thereby resulting in a lower standard deviation.

    Other options are not correct. A portfolio consisting of 30 energy stocks will have a higher level of covariance between the security returns. Therefore, the standard deviation is lower.

    A coefficient of variance greater than one will have a high level of variance while a coefficient variance less than 1 has a lower level of variance. A lesser covariance will result to a lower standard deviation and vice-versa.
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Home » Business » A financial planner is examining the portfolios held by several of her clients. Identify which of the following portfolios is likely to have the smallest standard deviation: A portfolio consisting of about 30 randomly selected stocks A portfolio
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