If A and B are two risky assets that are less than perfectly correlated, and P is a portfolio with 1/2 its value in A and 1/2 its value in B, then: A) Volatility of P = 1/2)Volatility of A) + 1/2)Volatility of B) B) Volatility of P 1/2)Volatility of A) + 1/2)Volatility of B) C) Volatility of P

Question

If A and B are two risky assets that are less than perfectly correlated, and P is a portfolio with 1/2 its value in A and 1/2 its value in B, then:
A) Volatility of P = 1/2)Volatility of A) + 1/2)Volatility of B)
B) Volatility of P > 1/2)Volatility of A) + 1/2)Volatility of B)
C) Volatility of P < 1/2)Volatility of A) + 1/2)Volatility of B)
D) Volatility of P = 1/4)Volatility of A)*Volatility of B)

Quizplus · Accepted Answer

The volatility of a portfolio composed of assets that are less than perfectly correlated is less than the weighted average of the individual assets' volatilities due to the diversification effect.

If a and B Are Two Risky Assets That Are