The standard deviation of a portfolio: A. must be equal to or greater than the l

Question

The standard deviation of a portfolio:
A. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio.
B. is a weighed average of the standard deviations of the individual securities held in the portfolio.
C. can be less than the standard deviation of the least risky security in the portfolio.
D. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio.
E. can never be less than the standard deviation of the most risky security in the portfolio.

Explanation / Answer

B. is a weighed average of the standard deviations of the individual securities held in the portfolio. Most investors do not hold stocks in isolation. Instead, they choose to hold a portfolio of several stocks. When this is the case, a portion of an individual stock's risk can be eliminated, i.e., diversified away. This principle is presented on the Diversification page. First, the computation of the expected return, variance, and standard deviation of a portfolio must be illustrated

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