Solutions – Tutorial Week 2
Chapter 8
14.
In the context of a welldiversified portfolio, the only risk characteristic
of a single security that matters is the security’s 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.
With 50 stocks, all with the same standard deviation (0.30), the
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 '10
 .
 Standard Deviation, Variance, Lonesome Gulch

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