The Standard Deviation of a Portfolio Will Tend to Increase

question 358

Multiple Choice

The standard deviation of a portfolio will tend to increase when:

• A) A risky asset in the portfolio is replaced with Treasury bills.
• B) One of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
• C) The portfolio concentration in a single cyclical industry increases.
• D) The weights of the various diverse securities become more evenly distributed.
• E) Short-term bonds are replaced with long-term bonds.

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Definitions:

Zero-balance Account

A checking account set up to maintain a balance of zero by automatically transferring funds from a master account in the exact amount of transactions.

Miller-Orr Model

A financial model used for managing cash balances by setting upper and lower limits on cash reserves.

Upper Cash Limit

The maximum cash balance a company sets to hold on hand, beyond which excess funds are usually invested in short-term securities.

Lockbox Services

Banking services that process payments for companies by collecting and depositing checks into their accounts.