Question

Explain what would reduce the standard deviation and hence risk of the two country portfolio even further.

Answer 1

Answer: Standard deviation- It expresses by how much elements of a group differ from the mean value for the group. It is a statistic that measures the dispersion of data from its mean value. It is calculated as square root of the variance. Its symbol is $\sigma$ .

A high standard deviation tells that the values are spread out while a low standard deviation tells that the values are closer to mean. Higher the standard deviation of a portfolio, the portfolio is more riskier.

Reducing standard deviation- Standard deviation can be reduced by following steps:

• When the variation in data is less, standard deviation will also be less and results will be more precise.
• Most of the data should be clustered around the mean so that standard deviation can be lower.
• Sample size should be increased so as to get the lower standard deviation. If number of shares are increased in the portfolio, portfolio will be more diversified and risk will also be diversified.