Diversification Now let's consider the portfolio, P, of which 75% invested in B and the...
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Diversification Now let's consider the portfolio, P, of which 75% invested in B and the rest in S. Portfolio P's expected retum is 9.725% which is the weighted average of 8.8% ( Ers) and 12.5% (= Ers). It is closer to 8.8% than to 12.5% because 75% is invested in B. How about the standard deviation of the portfolio? Is it between og = 8.68% and os = 17.5%? The answer is NO. Why is the standard deviation of the portfolio lower than the standard deviation of B or S? WB WS Elrp) OP 1.00 0.00 8.8 8.68 0.75 0.25 9.725 6.06 1.00 12.5 17.5 Go to Threaded Discussion #1 and give your response to the following question: Class Discussion Question #1 In the above example, the standard deviation of the portfolio's return is lower than that of these two funds B and S. What is the intuition behind this? Is it always the case? Examine how the returns on these two funds behave. Do they move together or in opposite directions? norly we can reduce risk. Portfolio P's standard deviation (= cp) is
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