A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to h
ave the smallest standard deviation? A portfolio with 10 randomly selected international stocks. A portfolio with 10 randomly selected stocks from U.S. and international markets. A portfolio with 10 randomly selected U.S. stocks.
Answer: The portfolio with U.S. stocks only is likely to have the smallest standard deviation.
Step-by-step explanation: Standard deviation is a measure of volatility in the data, in other words, the difference between the data points. Large differences among data points lead to a higher value of standard deviation.
A portfolio with a higher proportion of international stocks is more likely to have a higher standard deviation, as international stocks may come from many different economies, thus may be affected by different economic conditions and yield different rate of returns. On the contrary, a portfolio with U.S. stocks only should get a lower value of standard deviation since all of the stocks should be uniformly affected by the economic condition of the same economy.
