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) The individual stock's standard deviation will be lower.
B) The individual stock's standard deviation will be higher.
C) The standard deviations should be equal.
D) There is no relationship.

Question

Quizplus · Accepted Answer

The standard deviation of an individual common stock is generally higher than the standard deviation of a diversified portfolio of common stocks. This is because a diversified portfolio contains a mix of stocks across different sectors and industries, which helps to reduce the overall risk. An individual stock, on the other hand, is subject to company-specific risk factors that can impact its volatility. Therefore, the standard deviation of the individual stock is typically higher than that of a diversified portfolio.

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