Question

True or False: Increasing the number of stocks in a portfolio reduces market risk.

A) True

B) False

Consider two stock portfolios. Portfolio A consists of four different stocks from firms in different industries. Portfolio B consists of 10 different stocks, also from firms in different industries. The return on Portfolio A is likely to be 1) ________ (MORE or LESS) volatile than that of Portfolio B.

Suppose a stock analyst recommends buying stock in the following companies:

Company	Industry
Toyonda	Automotive
Saalvo	Automotive
GMW	Automotive
Honsubishi	Automotive
Shexxon	Oil and gas
Mobron	Oil and gas
Airing	Aircraft
Boebus	Aircraft
Goohoo	Technology
Pherk	Pharmaceutica

2) Each of the following portfolios contains four of the stock picks. Which portfolio is the least diversified?

A) Toyonda, Honsubishi, Boebus, Airing

B) Boebus, Airing, Shexxon, Mobron

C) Pherk, Airing, Goohoo, Shexxon

D) Toyonda, Saalvo, GMW, Honsubishi

Answer 1

\(1 .\)

\(\underline{\text { B) }}\) False (It just spreads risk, does not reduce it)

2

Consider two stock portfolios. Portfolio A consists of four different stocks from firms in different industries. Portfolio B consists of 10 different stocks, also from firms in different industries. The return on Portfolio \(\mathrm{A}\) is likely to be \(\underline{\text { MORE }}\) volatile than that of Portfolio \(\mathrm{B}\).

\(3 .\)

D) Toyonda, Saalvo, GMW, Honsubishi

Option A : Toyonda, Honsubishi, Boebus, Airing: In this 2 are from Automotive(Toyonda, Honsubishi) while 2 are from Aircraft Industry (Boebus, Airing). Hence this option is diversified in 2 industry.

Option B : Boebus, Airing, Shexxon, Mobron: In this 2 are from Oil and Gas (Shexxon, Mobron) while 2 are from Aircraft Industry (Boebus, Airing). Hence this option is diversified in 2 industry.

Option C : Pherk, Airing, Goohoo, Shexxon: Pherk is from Pharmaceutical, Airing is from Aircraft, Goohoo is technology and Shexxon is from Oil and Gas industry. Hence this option is diversified in 4 industry.

Option D : Toyonda, Saalvo, GMW, Honsubishi. All four are from Automotive industry. Hence this option is least diversified.