Consider a portfolio with three stocks,each with the same value.The three stocks have standard deviations of 20%,40%,and 90%.The standard deviation of this portfolio is
A) no greater than 50%.
B) less than 20%.
C) exactly 40%.
D) more than 90%.

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio depends on the standard deviations of the individual stocks, their correlations, and their weights in the portfolio. Given that each stock has the same value (implying equal weights) and without information on the correlations between the stocks, it's impossible to precisely calculate the portfolio's standard deviation. However, it's unlikely to exceed the highest individual standard deviation (90%) because diversification generally reduces a portfolio's overall risk. Therefore, the best answer with the given information is that the portfolio's standard deviation is no greater than 50%, which suggests some level of risk reduction through diversification without specifying the exact impact.

Consider a Portfolio with Three Stocks,each with the Same Value