A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Question

Quizplus · Accepted Answer

A portfolio's risk is not measured by the weighted average of the standard deviations of the securities in the portfolio, but rather by the portfolio's overall standard deviation, which takes into account the correlation between the returns of the securities in the portfolio. Diversification reduces risk when the returns of the securities are not perfectly correlated.

A Portfolio's Risk Is Measured by the Weighted Average of the Standard