Which one of the following statements is correct concerning the standard deviation of a portfolio? A....

Which one of the following statements is correct concerning the standard deviation of a portfolio?

A. The greater the diversification of a portfolio, the greater the standard deviation of that portfolio.

b. The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio?

c. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.

d. Standard deviation measures only the systematic risk of a portfolio.

e. The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within a portfolio.

Solutions

Expert Solution

Correct answer is option b

b. The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio?

Explaination: if the portfolio is analysed by assigning weights to the securities, it will give the respective risk factor of each security and not an average effect. so the risk can be minimisd by doing so and hence the SD will be lowered.

a is not true since the diversification of a portfolio itself is a risk minimisation technique.

c. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio, No it is used to measure total risk.

d. Standard deviation measures only the systematic risk of a portfolio, No it is used to measure total risk (Sys + Non Sys)

e. The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within a portfolio, not true. the formula is same and based on all observations and not individual SD

jeff jeffy answered 2 years ago

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