The act of adding more risk-free assets to the portfolio help in lessening of the risk.
What is a rational investor views on Standard deviation?
A Standard deviation refers to a risk measurement tool for the held portfolio.
The Portfolio Return= y*risky asset+ Risk-free asset* (1-y)
- The underestimation of expected return and standard deviation will artificially decrease the return per unit of the risk.
- Now, to return to the proper risk and return relationship of the portfolio, the investor needs to decrease the amount of risky investments.
In conclusion, the act of adding more risk-free assets to the portfolio help in lessening of the risk.
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