For two investments with a correlation coefficient (rij) less than +1, the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.
A)more than
B)less than
C)equal to
D)zero compared to

Question

Quizplus · Accepted Answer

The portfolio standard deviation will be less than the weighted average of the individual investments' standard deviation because the correlation between the two investments reduces the overall risk of the portfolio. This is due to the fact that the returns of the two investments are not perfectly positively correlated, therefore reducing the impact of one investment's risk on the overall portfolio risk.

For Two Investments with a Correlation Coefficient (Rij) Less Than