For two investments with a correlation coefficient (rij)less than +1,the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.

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Quizplus · Accepted Answer

The portfolio standard deviation is not simply the weighted average of the individual investments' standard deviation. Rather, the portfolio standard deviation is affected by the correlation between the two investments. When the correlation coefficient is less than +1, it means that the two investments are not perfectly positively correlated, and as a result, diversification benefits can be achieved. This lowers the portfolio standard deviation compared to the weighted average of the individual investments' standard deviation. Therefore, the portfolio standard deviation will always be less than the weighted average of the individual investments' standard deviation when correlation coefficient is less than +1.

For Two Investments with a Correlation Coefficient (Rij)less Than +1,the