The portfolio standard deviation will be equal to the weighted average of its components' standard deviations only if the correlation coefficient for returns among the components is
A) -1.
B) 1.
C) .5.
D) -.5.

Question

Quizplus · Accepted Answer

When the correlation coefficient for returns among the components is 1, it means they move perfectly in sync with each other, and there is no diversification benefit from adding them to the portfolio. In this case, the portfolio standard deviation will be the same as the weighted average of the components' standard deviations. Therefore, the best choice is B.

The Portfolio Standard Deviation Will Be Equal to the Weighted