Discuss the meaning of the following statements: The standard deviation of any portfolio of stocks can never be higher than the highest individual stock standard deviation. However, a portfolio’s standard deviation can be lower than the lowest individual stock standard deviation. [The corollary to this is a portfolio’s stand-alone risk could be zero even when individual stocks each have a lot of stand-alone risks.]
Diversification means making in investment in different type of assets at same time to minimize the total level of risk in investment. Diversification is one of the way, use to minimize the level of risk in investment in assets.
A portfolio is group of stocks which different level of risk and different return. Standard deviation of overall portfolio is always lower than individual stock of highest standard deviation and higher than lower standard deviation stock because of diversification.
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