You own Stock A with a standard deviation of 48% and Stock B with a standard deviation of 35%. As you add more Stock A to your portfolio, the standard deviation of your portfolio will:
A) always increase.
B) always decrease.
C) remain the same.
D) It depends on the initial weights and the correlation.
E) Insufficient information.

Question

Quizplus · Accepted Answer

The change in the standard deviation of the portfolio will depend on the initial weights of Stock A and Stock B and their correlation. If the correlation between the two stocks is negative, adding more of Stock A to the portfolio can actually decrease the overall standard deviation. However, if the stocks are positively correlated, adding more of Stock A to the portfolio will likely increase the standard deviation. Therefore, the correct answer is D.

You Own Stock a with a Standard Deviation of 48