A portfolio manager for Klein Capital Management has been slowly increasing the number of stocks in his portfolio randomly over the last five years. Currently, the portfolio contains 20 stocks. Over time, what has most likely happened to the risk of the portfolio if macroeconomic variables have remained steady?
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A. B. C.A
Based on the information provided, the portfolio manager for Klein Capital Management has been randomly increasing the number of stocks in the portfolio over the last five years. The portfolio currently contains 20 stocks. The question asks about the likely impact on the risk of the portfolio if macroeconomic variables have remained steady.
In this scenario, it is important to understand the concepts of systematic risk and unsystematic risk.
Systematic risk, also known as market risk or non-diversifiable risk, refers to the risk factors that affect the overall market or a particular segment of the market. These factors are beyond the control of individual investors and are related to macroeconomic variables such as interest rates, inflation, economic growth, and geopolitical events. Systematic risk cannot be diversified away and affects all investments to some degree.
Unsystematic risk, also known as specific risk or diversifiable risk, refers to the risks that are specific to individual securities or industries. These risks can be mitigated through diversification, which means investing in a variety of assets across different industries, sectors, or geographic regions. By diversifying a portfolio, investors can potentially reduce unsystematic risk.
Now let's analyze the options provided:
A. Unsystematic risk has been decreasing. B. Systematic risk has been decreasing. C. Both systematic and unsystematic risk remain at average levels.
Since the portfolio manager has been increasing the number of stocks randomly over the last five years, it indicates that the portfolio has become more diversified. Diversification is a strategy used to mitigate unsystematic risk. By adding more stocks to the portfolio, the manager is spreading the risk across a larger number of securities. As a result, the unsystematic risk of the portfolio is likely to decrease. Therefore, option A is a plausible answer.
However, the question specifically mentions that the macroeconomic variables have remained steady. It implies that the systematic risk, which is related to macroeconomic factors, has not changed. Systematic risk is not influenced by the number of stocks in the portfolio but rather by external market conditions. Therefore, option B, which states that systematic risk has been decreasing, is less likely to be the correct answer.
Option C suggests that both systematic and unsystematic risk remain at average levels. This option is not entirely accurate because the addition of more stocks to the portfolio should have reduced unsystematic risk. Thus, option C is less likely to be the correct answer.
In conclusion, based on the information provided, the most likely outcome is that unsystematic risk has been decreasing (option A). Systematic risk is likely to remain at the same level since the macroeconomic variables have remained steady.