The average variance of the annual returns from a typical stock is about 1500 an

Question

The average variance of the annual returns from a typical stock is about 1500 and the average covariance between two stocks is about 400. (Note: the return is in percentage points instead of decimals) (1) (10 points) Assume equal sized holdings of each stock, work out the standard deviation of returns from: a. A fully diversified portfolio b. A portfolio of 64 stocks c. A portfolio of 16 stocks d. A portfolio of 4 stocks e. A portfolio of one stock (2) (5 points) Plot your results, with standard deviation of a portfolio return on the vertical axis and the number of stocks in the portfolio on the horizontal axis. (3) (10 points) How much is the market risk? How much is the individual (unique) risk for a typical stock? (4) (5 points) From the results above, is a portfolio of 16 stocks well diversified?

Explanation / Answer

b. A portfolio of 64 stocks

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.