The Effect of Diversification Finance 748 The purpose of adding additional stocks to a portfolio is to diversify – to reduce risk. The extent to which risk (as measured by standard deviation) is reduced is determined by the stocks’ covariances (correlations) with each other, and their individual variances (standard deviations). In this exercise, you will select 30 stocks to put together for a portfolio. You may select them at random, with the intention of selecting stocks with low correlations with each other, with the intention of selecting stocks with high correlations with each other, using stocks that you are considering for your Stock-Trak assignment, or whatever method you choose. These need to be stocks for which you can find monthly prices (adjusted for dividends, stock splits, etc.) for a 61-month period. The easiest way to do this is through Yahoo! Finance. They all need to be for the same 61-month period. You will also need to find the values for the S&P 500 index (symbol ^GSPC) over that same time period. Do
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This note was uploaded on 03/09/2008 for the course FINC 725 taught by Professor Hansen during the Spring '08 term at Tulane.