Explanation:
Investment 1 involves holding a single randomly chosen asset from the index, which is replaced monthly with another random asset. This strategy has no diversification - it's essentially holding a single stock portfolio each month.
Investment 2 equally weights all 100 assets in the index, providing full diversification across the entire index.
Since Investment 1 lacks diversification while Investment 2 is fully diversified, Investment 1 will have greater annualized standard deviation (higher volatility) than Investment 2.
Correct Answer: C - greater than the annualized standard deviation of Investment 2.
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A market index consists of 100 assets. Investment 1 consists of one asset that is randomly chosen from the index. Every month the asset is replaced by a new randomly chosen asset. Investment 2 equally weights all assets in the index. Over a period of 100 months, the annualized standard deviation of Investment 1 is most likely:
A
less than the annualized standard deviation of Investment 2.
B
equal to the annualized standard deviation of Investment 2.
C
greater than the annualized standard deviation of Investment 2.
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