Question

The standard deviation of a portfolio:

A) Measures the amount of diversifiable risk inherent in the portfolio.

B) Can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

C) Is a measure of that portfolio's systematic risk.

D) Serves as the basis for computing the appropriate risk premium for that portfolio.

E) Is a weighted average of the standard deviations of the individual securities held

in that portfolio

Answer 1

Option b is correct because if the correlation between securities is less than 1 the standard deviation can be less.

Option a is incorrect because standard deviation includes standalone risk of a portfolio.

Option c is wrong because  beta is the measure of systematic risk of firm and not standard deviation

Option d is wrong because Risk premium can be calculated from expected returns and not form standard deviation

Option e is wrong because Standard deviation is the square root of the squares of products of weights and standard deviation and correlation coefficient.