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a. Explain the assertion that the relationship between the standard deviation on a portfolio and standard...

a. Explain the assertion that the relationship between the standard deviation on a portfolio and standard deviations of the assets in the portfolio is not a simple one.

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The standard deviation of the individual assets of the portfolio shows the variation of the return from the average expected return. While the portfolio standard deviation is also considers the Correlation between the securities. Suppose standard deviation of the one security in portfolio is 25% and another asset of same portfolio is 35%. If the two asset of this portfolio is having the negative correlation between the assets in such situation the standard deviation of the overall portfolio may be less than this two asset that's why it is said that diversification in the assets selection can reduce the overall risk of the portfolio so the main difference between the standard deviation of the individual security and the standard deviation of the portfolio is that the portfolio standard deviation also consider the correlation between the assets...

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jeff jeffy answered 1 year ago
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