What is the effect on outcomes if a portfolio has statistically independent shares from two companies, and the expected returns are the same for both?
A) The expected return is halved but the standard deviation remains constant.
B) The expected return is the same but the standard deviation increases.
C) The expected return doubles but the standard deviation remains constant.
D) The expected return is the same but the standard deviation is reduced.

Question

Quizplus · Accepted Answer

Because the shares are statistically independent, their combination will result in a reduction in overall risk, as measured by the standard deviation, while the expected return remains the same. This is due to the diversification effect of combining uncorrelated assets. Therefore, the answer is D - the expected return is the same but the standard deviation is reduced.

What Is the Effect on Outcomes If a Portfolio Has