An investor who diversifies by purchasing a 50-50 mix of two stocks that are not perfectly positively correlated will find that the standard deviation of the portfolio is:
A) the sum of the standard deviations of the two individual stocks.
B) greater than the sum of the standard deviations of the individual stocks.
C) greater than the standard deviation from holding the same balance in only one of these stocks.
D) less than the standard deviation from holding the same balance in only one of these stocks.

Question

Quizplus · Accepted Answer

Diversification reduces risk when the stocks are not perfectly positively correlated, leading to a portfolio standard deviation that is less than it would be from holding the same balance in only one of these stocks.

An Investor Who Diversifies by Purchasing a 50-50 Mix of Two