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

Q1 The reason is that the greater the number of stock in the portfolio the lower is the unsystematic risk associated with the investment because the investor receives an average portfolio of investment.

Q2 The greater are the number of the investments in different stocks the lower are the chances of vulnerability. This means that Portfolio A consist lower number of investments than portfolio B in different companies which means that the return on the portfolio A will be more volatile than portfolio B.

Q3 The investments in different industries is more diversified than the investment made in similar industry. The Pherk, Airing, Goohoo and Shexxon are four different industries which means that the investment in such companies is more diversified than other investments in similar industries.