Which one of these conditions must exist if the standard deviation of a portfolio comprised of two securities is to be less than the weighted average of the standard deviations of the individual securities held within that portfolio? A)β 1 C)ρ 1

Question

Which one of these conditions must exist if the standard deviation of a portfolio comprised of two securities is to be less than the weighted average of the standard deviations of the individual securities held within that portfolio? A)β < 1 B)R_m > 1 C)ρ < 1 D)β = 0 E)ρ > 1

Quizplus · Accepted Answer

The condition that must exist for the standard deviation of a portfolio to be less than the weighted average of the standard deviations of the individual securities is that the correlation between the securities (represented by the Greek letter rho, ρ) is less than 1. When the correlation is less than 1, the securities diversify each other, reducing the overall risk of the portfolio. Therefore, option C is the correct answer. The other options are not relevant to this question.

Which One of These Conditions Must Exist If the Standard