Question

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the volatility of a portfolio ________.

Answer 1

Answer: but the volatility of a portfolio is less than the weights in the stocks.

Step-by-step explanation:

Volatility means the rapid price fluctuations in the markets. When there is price fluctuation then there is risk of loosing a major part of investment or the investment completely. By investing in diversified assets the volatility can be reduced which also reduces the risks.

The each of components of the investment portfolio has expected returns is done through weighted average. The percentage of the portfolio's total value is used for weighted average of the components. The expected returns are calculated based on the historical cost.