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 be lowered by changing the weights of the securities in the portfolio. This is because the standard deviation measures the variability of returns of the portfolio and changing the weights can reduce the overall volatility. The other options are incorrect: A is incorrect because standard deviation is not used to determine the amount of risk premium, B is incorrect because the greater the diversification of a portfolio, the lower the standard deviation, C is incorrect because standard deviation measures both systematic and unsystematic risk, and E is incorrect because the standard deviation of a portfolio is influenced by the covariances between securities, not just the weighted average of the individual standard deviations.

Which One of the Following Statements Is Correct Concerning the Standard