Question

Diversification a. increases the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s return is higher. b. reduces the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s return is higher. c. reduces the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s return is lower. d. increases the likely fluctuation in a portfolio’s return. Thus, the likely standard deviation of the portfolio’s return is lower.

Answer 1

The correct answer is option C.

Step-by-step explanation:

Portfolio diversification can be defined as the process of spreading investment to a number of assets in order to reduce risk.

Higher risk is associated with higher return. In the process of diversification we invest on various assets, because investing on a single assets creates higher risk of loss.

Portfolio standard deviation measures overall portfolio's risk.

Diversification reduces fluctuation in the overall portfolio's return. The standard deviation of portfolio's return is also lower.