Question

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

1. do not have unique risk.
2. have more systematic risk.
3. offer higher returns.
4. have no diversification of risk.

Answer 1

4. Have no diversification of risk.

Step-by-step explanation:

Standard deviation or risks of owning one stock are generally higher than the portfolio because a portfolio is able to diversify risk by spreading exposure factors to a number of different variables. Since one asset will have wide exposure to only one variable, it gets risky. However when this risk factor spread out to a number of different assets, this exposure is curtailed.

Furthermore portfolios also have safety mechanics built into them like the negatively correlated assets and risk free assets that help cover losses when stocks misbehave.

Systematic risk is market wide risk that also affects the portfolio. Other options are conditional and or irrelevant.

Hope that helps.