Final answer:
The standard deviation of a portfolio can be calculated taking into account the standard deviation of each stock and their correlation. Diversifying the portfolio with stocks that have low or negative correlation can reduce the overall risk.
Step-by-step explanation:
The standard deviation of a portfolio can be calculated by considering the standard deviation of each stock in the portfolio, as well as the correlation between the stocks.
The formula to calculate the standard deviation of a portfolio is:
Standard Deviation of Portfolio = √((Weight of Stock A * Standard Deviation of Stock A)^2 + (Weight of Stock B * Standard Deviation of Stock B)^2 + 2 * (Weight of Stock A * Weight of Stock B * Standard Deviation of Stock A * Standard Deviation of Stock B * Correlation between Stock A and Stock B))
The combination of stocks in a portfolio affects the portfolio's risk. If the stocks are positively correlated, meaning they tend to move in the same direction, the portfolio's risk will be higher than if the stocks were negatively correlated or uncorrelated. Diversifying the portfolio with stocks that have low or negative correlation can help reduce the portfolio's overall risk.