Question

Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (p=0.4) with each of the other stocks. If the weighted average of the risk (standard deviation) of the individual securities in the partially diversified portfolio of four stocks is 39%, the portfolio's standard deviation most likely is ________ 39%.

a. equal to,
b. more than,
c. less than

Answer 1

c. less than

Step-by-step explanation:

As in the question, it is mentioned that the correlation coefficient is 0.4 which is less than one

Now if the weighted average of an individual of four stock is 39% so the portfolio standard deviation is less than 39% due to the correlation coefficient which is less than one

Hence, the correct option is c.