Final answer:
A portfolio's standard deviation is not merely the weighted average of its components' standard deviations as it includes the interaction, or correlation, between asset returns. This correlation can cause some risks to offset each other, thereby reducing the portfolio's overall risk.
Step-by-step explanation:
The standard deviation of a portfolio is not simply the weighted average of its components' standard deviations, because it also reflects the degree to which the component assets interact with each other, specifically in terms of their correlation. The variability of a portfolio's returns depends on the spread of each component's returns around their mean and how these components' prices move relative to each other. Therefore, option c, 'Some of the risk from certain components will offset the risk of other components,' is the correct answer to why a portfolio's standard deviation is not the same as the standard deviation of its components.
When the components of a portfolio have less than perfect correlation, particularly if some pairs of assets have negative correlation, some risks can indeed offset each other, reducing the overall portfolio risk below what would be expected by just averaging the standard deviations of the individual assets. The calculation for a portfolio's standard deviation therefore involves both the standard deviation of the individual assets and the covariance or correlation between the assets in the portfolio.