{"id":21018,"date":"2025-06-14T21:35:23","date_gmt":"2025-06-14T21:35:23","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=21018"},"modified":"2025-06-14T21:35:35","modified_gmt":"2025-06-14T21:35:35","slug":"when-we-form-an-equally-weighted-portfolio-of-stocks-and-keep-increasing-the-number-of-stocks-in-the-portfolio","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/when-we-form-an-equally-weighted-portfolio-of-stocks-and-keep-increasing-the-number-of-stocks-in-the-portfolio\/","title":{"rendered":"When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio"},"content":{"rendered":"\n<p>When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, the volatility of the portfolio also increases. <\/p>\n\n\n\n<p> options: True False<\/p>\n\n\n\n<p><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>The correct answer and explanation is:<\/strong><\/mark><\/p>\n\n\n\n<p><strong>Answer:<\/strong> False<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">Explanation:<\/h3>\n\n\n\n<p>When you form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, <strong>the volatility of the portfolio generally decreases<\/strong>, not increases.<\/p>\n\n\n\n<p>Here\u2019s why:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Diversification Effect:<\/strong><br>Volatility (or risk) of an individual stock comes from two parts:<ul><li><strong>Systematic risk:<\/strong> Market-wide risk that affects all stocks (like economic recessions, interest rate changes).<\/li><li><strong>Unsystematic risk:<\/strong> Company-specific risk (like management changes, product failures).<\/li><\/ul>When you combine multiple stocks in a portfolio, the <strong>unsystematic risks tend to cancel out<\/strong> because they are generally uncorrelated. If one stock has a bad event, it may be offset by another stock doing well.<\/li>\n\n\n\n<li><strong>Reduction of Unsystematic Risk:<\/strong><br>As you increase the number of stocks, the <strong>unsystematic risk diminishes<\/strong> because it diversifies away. This means the portfolio becomes less volatile due to company-specific shocks.<\/li>\n\n\n\n<li><strong>Volatility of the Portfolio:<\/strong><br>The overall volatility of the portfolio depends on:<ul><li>The individual volatilities of stocks<\/li><li>The correlations among the stocks<\/li><li>The number of stocks<\/li><\/ul>The formula for portfolio variance shows that as the number of stocks increases, and assuming the correlations are not perfectly 1, the portfolio variance decreases.<\/li>\n\n\n\n<li><strong>Limiting Volatility:<\/strong><br>While volatility decreases with diversification, it does not reduce to zero because <strong>systematic risk remains<\/strong>. Systematic risk is the market risk that affects all stocks and cannot be diversified away.<\/li>\n\n\n\n<li><strong>Why Volatility Does Not Increase:<\/strong><br>Adding more stocks spreads the investment over more assets, smoothing out the idiosyncratic swings. Hence, portfolio volatility tends to <strong>decrease or stabilize<\/strong>, not increase.<\/li>\n<\/ol>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">Summary:<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Increasing the number of stocks in an equally weighted portfolio reduces unsystematic risk, lowering total portfolio volatility.<\/li>\n\n\n\n<li>Systematic risk remains and sets a lower bound on portfolio volatility.<\/li>\n\n\n\n<li>Therefore, the statement &#8220;the volatility of the portfolio increases as the number of stocks increases&#8221; is <strong>False<\/strong>.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, the volatility of the portfolio also increases. options: True False The correct answer and explanation is: Answer: False Explanation: When you form an equally weighted portfolio of stocks and keep increasing the number of stocks in [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-21018","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/21018","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=21018"}],"version-history":[{"count":2,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/21018\/revisions"}],"predecessor-version":[{"id":21021,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/21018\/revisions\/21021"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=21018"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=21018"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=21018"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}