The volatility of Home Depot Share prices is 50% and that of General Motors shares is 50%. When I hold both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the portfolio is ________.
A) more than 25%
B) less than 50%
C) more than 50%
D) less than 25%

Question

Quizplus · Accepted Answer

When two assets have zero correlation, the overall portfolio volatility can be reduced through diversification. Since both stocks have the same volatility of 50% and zero correlation, the portfolio's volatility will be less than the individual volatilities of 50%, but not necessarily less than 25%. Hence, the correct answer is less than 50%.

The Volatility of Home Depot Share Prices Is 50% and That