Final answer:
Individual securities typically have a higher standard deviation than a large index because they are subject to idiosyncratic risk in addition to market risk. An index like the S&P 500 has a lower standard deviation due to the diversification benefits, which spread out unsystematic risks across a broader portfolio. The correct answer is a) False because individual securities are riskier.
Step-by-step explanation:
The question pertains to the concept of risk as measured by the standard deviation in finance, specifically in the context of individual securities versus large indices like the S&P 500. The standard deviation is a measure of the dispersion of a set of values relative to their mean, and in finance, it's often used to quantify the risk or volatility of an investment. Individual securities generally have higher standard deviations because they are subject to both market risk (systematic risk) and idiosyncratic risk (unique to the particular company or industry). In contrast, an index like the S&P 500, which includes a diversified array of companies, benefits from diversification effects that typically lower the overall standard deviation because the unsystematic risks are spread out across a larger portfolio of securities.
Therefore, in general, individual security will have a higher standard deviation than a large index such as the S&P 500 because the risks specific to individual companies can cause more significant fluctuations in their prices as compared to an index that is composed of many different companies. It is the pooling of different stocks and the associated reduction of idiosyncratic risk that ultimately contributes to a lower standard deviation for the index.