An Investor Who Diversifies by Purchasing a 50-50 Mix of Two

question 65

Multiple Choice

An investor who diversifies by purchasing a 50-50 mix of two stocks that are not perfectly positively correlated will find that the standard deviation of the portfolio is:

• A) the sum of the standard deviations of the two individual stocks.
• B) greater than the sum of the standard deviations of the individual stocks.
• C) greater than the standard deviation from holding the same balance in only one of these stocks.
• D) less than the standard deviation from holding the same balance in only one of these stocks.

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Definitions:

Annual Average Investment

The average amount invested over a year, generally calculated to evaluate the efficiency or profitability of investments.

Projected Income Statement

A projected income statement is a financial statement that estimates a company's revenue, expenses, and net income for a future period.

Asset's Life

The expected period during which an asset remains useful for its intended purpose or serviceable.