In: Finance
The standard deviation of a portfolio will tend to increase when:
A. a risky asset in the portfolio is replaced with U.S. Treasury bills. |
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B. one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry. |
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C. the portfolio concentration in a single cyclical industry increases. |
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D. the weights of the various diverse securities become more evenly distributed. |
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E. short-term bonds are replaced with Treasury Bills. |
A: Replacing Risky asset with risk-free asset (SD = 0) causes to decrease standard deviation of the portfolio
B: If it is replaced with unrelated stock, it can’t be predicted and can be lower or higher.
C: Portfolio Concentration is related to idiosyncratic (non-market) risk taken on by an ETF. High concentration increases risk. This is the right answer.
D: If now weights are evenly distributed, SD can be lower or higher.
E: same as A