investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10 However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.

Question

Quizplus · Accepted Answer

When stocks are held in portfolios, the relationship between required return and standard deviation is not always a direct one. It is possible to construct a portfolio in which the required return on a low standard deviation stock is higher than that on a high standard deviation stock. This is because the overall risk and return of the portfolio is affected by the interplay between the stocks in the portfolio, rather than just the characteristics of each individual stock.

Investors Are Risk Averse and Hold Only One Stock, We