Question

Why should standard deviation NOT be used when evaluating the riskiness of a stock that is considered to be included in a well-diversified portfolio?

Answer 1

Standard deviation should not be used to evaluate those stocks who are considered to be included in a well diversified portfolio because when these stocks are included in the well diversified portfolio, it will mean that all the systematic risk associated with those stocks will be getting eliminated because when a large number of diversified stocks are pooled together in a Portfolio then the individual risk associated with each of the company will be getting eliminated because of diversification.

Diversification is always known for eliminating the unsystematic and firm specific risk so these risk which are in nature of individual assets variation from the mean, will be getting eliminated as they are combined with a pool of assets and then the return will be dependent upon the fluctuation of the overall portfolio which is diversified.