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You are considering a portfolio only of long positions not involving leverage and have the following information:
Stock | Expected Return | Variance | Correlation
1 |15% | 100 | R1,2 = 0.6 2 |18% | 64 | R1,3 = 0.2 3 |24% | 400 | R2,3 = -1.0
Without doing any calculations, what is the correct statement about the risk of a portfolio consisting of these three stocks?
A. The portfolio standard deviation must be between 8% and 20%.
B. The portfolio standard deviation could be larger than 20%.
C. The portfolio standard deviation could be less than 8%.
Answer: C
Explanation:
The portfolio's standard deviation could be less than the lowest individual security's standard deviation of 8% because the correlation coefficients are all less than +1.0.

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