We can reduce volatility by investing in less than perfectly positively 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

Question

Quizplus · Accepted Answer

The volatility of a portfolio is less than the weighted average volatility of its component stocks when the stocks are not perfectly positively correlated. This is due to diversification benefits, where fluctuations in one stock may be offset by fluctuations in another stock, resulting in a lower overall volatility of the portfolio.

We Can Reduce Volatility by Investing in Less Than Perfectly