Question

True or False: A portfolio’s return is the weighted average of each individual investment’s return. However, a portfolio’s risk is not the weighted average of each investment’s standard deviation.

True

False

Answer 1

Answer - True

Reason - portfolio return is measured by taking the Wight of assets in the portfolio and multiplying them with individual returns as per weights.

However while calculating portfolio risk there's a lot more to consider. Risk is the variance of how much the asset is likely to increase or decrease in value. Two assets must be correlated together to find how they will work together. Two risky assets can go opposite in same market condition and make the portfolio risk neutral. Such assets are called as negatively correlated. Whereas if two assets go in same direction in same market condition are called positively correlated. Portfolio risk uses both asset risk and asset correlation coefficients to measures how likely the assets are to move together.

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