Question

A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation? A portfolio with 10 randomly selected international stocks. A portfolio with 10 randomly selected stocks from U.S. and international markets. A portfolio with 10 randomly selected U.S. stocks.

Answer 1

The portfolio with 10 randomly selected U.S. stocks is likely to have the smallest standard deviation.

Step-by-step explanation:

The portfolio with 10 randomly selected U.S. stocks is likely to have the smallest standard deviation. The standard deviation measures the volatility or risk of an investment. Since the U.S. stock market is generally more stable and has lower volatility compared to international markets, a portfolio of U.S. stocks is expected to have a smaller standard deviation.

Answer 2

Answer: The portfolio with U.S. stocks only is likely to have the smallest standard deviation.

Step-by-step explanation: Standard deviation is a measure of volatility in the data, in other words, the difference between the data points. Large differences among data points lead to a higher value of standard deviation.

A portfolio with a higher proportion of international stocks is more likely to have a higher standard deviation, as international stocks may come from many different economies, thus may be affected by different economic conditions and yield different rate of returns. On the contrary, a portfolio with U.S. stocks only should get a lower value of standard deviation since all of the stocks should be uniformly affected by the economic condition of the same economy.