Which two of the statements are correct?
A) For perfectly positive correlated investments portfolio standard deviation is equal to the weighted average of the standard deviation of the constituent investment.
B) For perfectly negatively correlated investments portfolio standard deviation is equal to the weighted average of the standard deviation of the constituent investment.
C) Portfolio standard deviation is usually greater than the weighted average of the standard deviation of the constituent investments.
D) Portfolio standard deviation is usually less than the weighted average of the standard deviation of the constituent investments.

Question

Quizplus · Accepted Answer

A) When investments are perfectly positively correlated, the portfolio's standard deviation equals the weighted average of the individual investments' standard deviations because the investments move exactly in tandem, amplifying each other's effects. D) Generally, due to diversification benefits, the portfolio standard deviation is less than the weighted average of the constituent investments' standard deviations, especially when the investments are not perfectly correlated. This is because diversification reduces the overall risk of the portfolio.

Which Two of the Statements Are Correct