What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?
A)individual stock's standard deviation will be lower
B)individual stock's standard deviation will be higher
C)the standard deviations should be equal
D)there is no way to predict this relationship

Question

Quizplus · Accepted Answer

The standard deviation of a diversified portfolio of common stocks should be lower than the standard deviation of an individual common stock because the diversification helps to reduce the overall risk in the portfolio. As the number of stocks in the portfolio increases, the diversification effect also increases, resulting in lower overall volatility. Therefore, the individual stock's standard deviation will be higher than the standard deviation of a diversified portfolio of common stocks.

What Is the Typical Relationship Between the Standard Deviation of an Individual