The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because the market portfolio:
A) offers lower returns.
B) has less systematic risk.
C) diversifies risk.
D) has specific risk.

Question

Quizplus · Accepted Answer

The market portfolio diversifies risk by holding a variety of stocks, which can reduce the impact of specific risk. Individual stocks, on the other hand, are more susceptible to specific risk, which adds to their overall standard deviation. Therefore, the standard deviation of the market portfolio is generally lower than that of individual stocks.

The Standard Deviations of Individual Stocks Are Generally Higher Than