Which one of the following statements is correct concerning the standard deviation of a portfolio?
A) The greater the diversification of a portfolio, the greater the standard deviation of that portfolio.
B) The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
C) Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
D) Standard deviation measures only the systematic risk of a portfolio.
E) The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio can be lowered by changing the weights of the securities in the portfolio because the standard deviation of a portfolio is not only affected by the standard deviation of individual securities but also by the correlation between the securities. By changing the weights of securities, an investor can alter the correlation between them and thus lower the standard deviation of the portfolio.

Which One of the Following Statements Is Correct Concerning the Standard