If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ________.
A) calculate two covariances and one trivariance
B) calculate only two covariances
C) calculate three covariances
D) average the variances of the individual stocks

Question

Quizplus · Accepted Answer

To calculate the portfolio standard deviation for a three-stock portfolio, you need to calculate three covariances. This is because the portfolio's risk (standard deviation) depends not only on the individual risks (variances) of the stocks but also on how the stocks' returns move relative to each other, which is captured by the covariances. For a three-stock portfolio, you calculate the covariance between each pair of stocks, resulting in three covariances.

If You Want to Know the Portfolio Standard Deviation for a Three-Stock