When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,
A) The portfolio standard deviation will be greater than the weighted average of the individual security standard deviations.
B) The portfolio standard deviation will be less than the weighted average of the individual security standard deviations.
C) The portfolio standard deviation will be equal to the weighted average of the individual security standard deviations.
D) The portfolio standard deviation will always be equal to the securities' covariance.
E) None of these are true.

Question

Quizplus · Accepted Answer

When two risky securities are positively correlated but not perfectly, the diversification effect reduces the portfolio's standard deviation, making it less than the weighted average of the individual securities' standard deviations.

When Two Risky Securities That Are Positively Correlated but Not