Which one of the following statements is correct concerning the standard deviation of a portfolio?
A)Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
B)The greater the diversification of a portfolio,the greater the standard deviation of that portfolio.
C)Standard deviation measures only the systematic risk of a portfolio.
D)The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
E)The standard deviation of a portfolio must equal the weighted average of the standard deviations of the individual securities held within the portfolio.

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. This is the basic principle behind portfolio diversification. By combining different securities, an investor can reduce the overall risk of the portfolio without sacrificing returns. Therefore, the standard deviation of a well-diversified portfolio should be lower than the weighted average of the standard deviations of its individual securities.

Which One of the Following Statements Is Correct Concerning the Standard