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) The individual stock's standard deviation will be lower.
B) The 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 diversification process reduces the overall portfolio's risk, so the standard deviation of a diversified portfolio of common stocks is typically lower than that of an individual common stock. Therefore, the correct answer is that the individual stock's standard deviation will be higher.

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