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Stock X Stock Y
Percent of portfolio 75% 25%
Average annual return 11% 9%
Standard deviation of returns 2.0 3.0
Covariance of returns -5
Which of the following facts explains why the standard deviation of the portfolio is less than the standard deviation of either of the two stocks that make up the portfolio?
A. The fact that Stock X has a lower standard deviation than Stock Y
B. The fact that the portfolio consists of two stocks rather than one
C. The fact that Stock Y has a lower average annual return than Stock X
D. The fact that Stocks X and Y have a negative correlation coefficient
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Diversification refers to the process of:
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