A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations. When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.

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Business

Krish Abbott

2 January, 20:28

A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations. When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.

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Aubrey House · Answer 1

The risk in a portfolio will decrease if stocks with negative correlation are added to the portfolio as both the stocks prices will move in opposite directions therefore decreasing the risk of both stocks pricing to decrease at the same moment. Adding Negatively co related stocks to the portfolio is the best way to reduce risk and increase diversification.

The total risk of the portfolio can be calculated by calculating the co variances of all its stocks.