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Answer: Standard deviation of the equally weighted portfolio's returns to the average standard deviation of the individual securities' returns.
The diversification ratio measures the benefit of diversification by comparing the standard deviation of an equally weighted portfolio to the average standard deviation of the individual securities in the portfolio. This ratio is calculated as the standard deviation of the equally weighted portfolio divided by the average standard deviation of the individual securities. - **Option A** is correct because it accurately describes this ratio. - **Option B** is incorrect because it reverses the numerator and denominator and does not use the average standard deviation of individual securities. - **Option C** is incorrect because it uses the average standard deviation of individual securities as the numerator, which is not the correct approach.
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The diversification ratio of a portfolio is best described as the ratio of the:
A
Standard deviation of the equally weighted portfolio's returns to the average standard deviation of the individual securities' returns.
B
Standard deviation of the market-capitalization-weighted portfolio's returns to the standard deviation of the equally weighted portfolio's returns.
C
Average standard deviation of the individual securities' returns to the standard deviation of the market-capitalization-weighted portfolio's returns.
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