What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?
A)Individual stock's standard deviation will be lower
B)Individual stock's standard deviation will be higher
C)The standard deviations should be equal
D)There is no way to predict this relationship

Question

Quizplus · Accepted Answer

The standard deviation of a diversified portfolio of common stocks is expected to be lower than the standard deviation of an individual common stock because the diversification reduces unsystematic risk. In other words, diversification helps to offset the impact of the idiosyncratic risks of individual stocks, thereby reducing the overall risk of the portfolio. Thus, the standard deviation of a diversified portfolio of stocks is likely to be lower than that of an individual stock.

What Is the Typical Relationship Between the Standard Deviation of an Individual