We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks,but the volatility of a portfolio:
A)is higher than the weighted average volatility.
B)is independent of weights in the stocks.
C)is less than the weighted average volatility.
D)depends on the expected return.
E)is the same as the weighted average volatility.

Question

Quizplus · Accepted Answer

The volatility of a portfolio is less than the weighted average volatility because less than perfectly correlated assets tend to move in opposite directions, thus offsetting each other's volatility. This effect is known as diversification, and it reduces the overall volatility of the portfolio. Therefore, option C is the correct choice.

We Can Reduce Volatility by Investing in Less Than Perfectly