Suppose you have two assets, each has a standard deviation of 0.20. The portfolio weight is 50% for each of the two assets. In which case will the portfolio standard deviation be the smallest

The correlation between the 2 assets is zero

Explanation:

Portfolio standard deviation shows by how much the performance of the assets that makes up a portfolio deviate from a mean amount.

In the given instance two assets, each has a standard deviation of 0.20 and portfolio weight is 50% for each of the two assets.

In calculating standard deviation of the portfolio we consider the correlation between the two assets.

A positive correlation means as one asset goes up the other goes up to. This increases the deviation from the mean as both assets move away from it.

A negative correlation means as on asset increases the other decreases. This also results in greater deviation from the mean as both assets move away from it.

However when correlation is zero the movement of one asset does not affect the other.

For example of one asset increase the other remains constant. So total deviation from the mean is reduced

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