Question
Suppose each stock in a portfolio has a correlation coefficient of 0.35 with each of the other stocks. The market's average standard deviation is about
Suppose each stock in a portfolio has a correlation coefficient of 0.35 with each of the other stocks. The market's average standard deviation is about 21%, and the weighted average of the risk of the individual stocks in the portfolio is 27%. If 50 additional, randomly selected stocks with a correlation coefficient of 0.30 with other stocks in the portfolio were added to the portfolio, what effect would this have on the portfolio's standard deviation?
Group of answer choices
A) It would gradually settle at about 21%, the market's standard deviation.
B) It would gradually settle at about 35%.
C) It would gradually settle at about 54%.
D) It would stay constant at 27%.
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