Question

What statistical terms dominate portfolio risk with large N ( number of securities in the portfolio)?

A) Variance

B) Covariance

C) standard deviation

D) coefficient of variation

Answer 1

Answer to this question is option C standard deviation

Since a portfolio with large number of securities is considered well-diversified and have no systematic risk.

Therefore only relevant risk for that portfolio is unsystematic risk which can be measured using standard deviation.

Covariance is relative way of measuring the risk and is useful while calculating Beta (Systematic risk)

Coefficient of variation is standard deviation / mean. Coefficient of variation can be used when we are looking risk relative to returns.

Variance is just square of standard deviation.