There's always a choice regarding investing in common stock (equity) portfolios with being either (1) well-diversified or (2) not well-diversified. Thus a portfolio of 10 stocks is absolutely going to have a higher standard deviation of returns than a well-diversified portfolio such as a S&P 500 Index or total market index mutual fund.

 

Why does the undiversified portfolio have a higher standard deviation of returns (i.e., more volatile) than the well-diversified portfolio?

Since the returns are more risky or volatile for the undiversified portfolio, should an investor expect to receive extra compensation (higher returns) for this additional risk?

Answer rating: 100% (QA)

The undiversified portfolio has a higher standard deviation of returns because it is more exposed to ... View the full answer