bre44380_ch07_162-191.indd 174 10/09/15 10:08 PM
174 Part Two RiskTake a look also at Table 7.4, which shows the standard deviations of some well-known
stocks from different countries and of the markets in which they trade. Some of these stocks
are more variable than others, but you can see that once again the individual stocks for the
most part are more variable than the market indexes.
This raises an important question: The market portfolio is made up of individual stocks, so
why doesn’t its variability reflect the average variability of its components? The answer is that
diversification reduces variability.
Even a little diversification can provide a substantial reduction in variability. Suppose you
calculate and compare the standard deviations between 2006 and 2010 of one-stock portfolios,◗ FIGURE 7.8
Annualized standard
deviation of the pre-
ceding 52 weekly
changes in the Dow
Jones Industrial Aver-
age, 1900–2014.Standard deviation, %Year1900190719141921192819351942194919561963197019771984199119982005201220140102030405060Stock Standard Deviation (σ) Stock Standard Deviation (σ)
Ford 31.0 Microsoft 20.7
Newmont 30.0 Campbell Soup 16.6
Caterpillar 29.2 Walmart 15.3
Dow Chemical 27.5 Consolidated Edison 13.8
Apple 25.2 Johnson & Johnson 13.2❱ TABLE 7.3
Standard deviations for
selected U.S. common
stocks, November 2009–
October 2014 (figures in
percent per year).Standard
Deviation (σ)Standard
Deviation (σ)
Stock Market Stock Market
BHP Billiton (Australia) 19.8 12.4 LVMH (France) 23.7 16.7
BP (U.K.) 29.1 13.5 Nestlé (Switzerland) 9.7 10.4
Siemens (Germany) 20.3 18.4 Sony (Japan) 44.8 19.3
Samsung (Korea) 24.6 15.1 Toronto Dominion Bank (Canada) 12.6 11.0
Industrial Bank (China) 35.0 19.8 Tata Motors (India) 39.1 17.3❱ TABLE 7.4
Standard
deviations for
selected foreign
stocks and market
indexes, November
2009–October 2014
(figures in percent
per year).