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:

Cash Payback Period

The time it takes for an investment to generate enough cash flow to recoup the initial outlay.

Net Cash Flows

The difference between the cash inflows and outflows in a company during a specific period, reflecting the company’s overall liquidity position.

Estimated Cost

An approximation of the cost to complete a project, task, or transaction, made in the absence of full information.

Capital Investment Evaluation

The process of assessing the profitability and risk of proposed investments or projects to make informed decisions about capital allocations.