• Determine whether adding securities to the portfolio reduces the portfolio risk as measured by the...

• Determine whether adding securities to the portfolio reduces the portfolio risk as measured by the standard deviation and the benefits of diversification

Expert Solution

Addition of securities into the portfolio will be reducing the unsystematic risk associated with overall portfolio because unsystematic risk reflects a specific risk which will be affecting the overall rate of return of the portfolio so, there is a need for addition of of higher number of securities from different sectors of the economy which will be representative of lower correlation and hence there will be a higher level of diversification which will reduce the the IDIOSYNCRATIC risk in the portfolio.

standard deviation is a measure of total risk and it also include idiosyncratic risk in the portfolio and hence diversification will be helping to reduce the unsystematic risk.

Diversification will be leading to lower risk in the portfolio along with lower correlation with the stocks in the portfolio and it will also mean that there will be a protection from the adverse economic scenario and these portfolio are also having a chance of maximization of rate of return in the the favourable economic cycles.

jeff jeffy answered 2 years ago

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