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Unformatted text preview: Solutions Tutorial Week 2 Chapter 8 14. In the context of a well-diversified portfolio, the only risk characteristic of a single security that matters is the securitys contribution to the overall portfolio risk. This contribution is measured by beta. Lonesome Gulch is the safer investment for a diversified investor because its beta (+0.10) is lower than the beta of Amalgamated Copper (+0.66). For a diversified investor, the standard deviations are irrelevant. 16. a. Refer to Figure 8.13 in the text. With 100 securities, the box is 100 by 100. The variance terms are the diagonal terms, and thus there are 100 variance terms. The rest are the covariance terms. Because the box has (100 times 100) terms altogether, the number of covariance terms is: 100 2 100 = 9,900 Half of these terms (i.e., 4,950) are different. b. Once again, it is easiest to think of this in terms of Figure 8.13....
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