Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is positive? A) $\sigma$²rp (W₁²$\sigma$₁² + W₂²$\sigma$₂²)

Question

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is positive? A) $\sigma$²rp < (W₁²$\sigma$₁² + W₂²$\sigma$₂²) B) $\sigma$²rp = (W₁²$\sigma$₁² + W₂²$\sigma$₂²) C) $\sigma$²rp = (W₁²  ₁² - W₂²$\sigma$₂²) D) $\sigma$²rp > (W₁²$\sigma$₁² + W₂²$\sigma$₂²)

Quizplus · Accepted Answer

The standard deviation of returns of a two asset portfolio is always less than the weighted average of the individual standard deviations of returns when the correlation coefficient is positive. This is because the positive correlation means that the returns of the two assets tend to move in the same direction, which reduces the overall risk of the portfolio.

Which of the Following Is a Correct Expression Concerning the Formula