325.3
3.Why isn't the risk of a portfolio just a
weighted average of the risks of the assets in the portfolio? (1
pt)
The risk of a portfolio is highly dependent on how the returns of the assets in that portfolio co-vary. If
the assets tend to move together, then the portfolio return will move around more than if the assets tend to move in opposite directions. We can combine two very risky assets and get a safe portfolio if the assets are negatively correlated, meaning that when asset is up, the other tends to be down. These offsetting up and down swings will result in little movement in the overall portfolio.