While the portfolio return is a weighted average of realised security returns, portfolio risk is not necessarily a weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine shares and actually reduce the riskiness of a portfolio.

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Quizplus · Accepted Answer

Portfolio risk can be reduced by diversification, which means investing in securities with low or negative correlations. This reduces the volatility of the portfolio and allows for a potential reduction in risk without sacrificing returns. Therefore, portfolio risk is not necessarily a weighted average of the standard deviations of the securities in the portfolio.

While the Portfolio Return Is a Weighted Average of Realised