When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,
A) the portfolio standard deviation will be greater than the weighted average of the individual security standard deviations.
B) the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.
C) the portfolio standard deviation will be equal to the weighted average of the individual security standard deviations.
D) the portfolio standard deviation will always be equal to the securities' covariance.

Question

Quizplus · Accepted Answer

When two risky securities that are positively correlated but not perfectly correlated are combined in a portfolio, diversification benefits lead to a portfolio standard deviation that is less than the weighted average of the individual security standard deviations. This is because the imperfect correlation allows for the offsetting of some risks.

When Two Risky Securities That Are Positively Correlated but Not