chap 8 - Because the box has(100 times 100 terms altogether...

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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 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.
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Unformatted text preview: 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 same weight in the portfolio (0.02), and all pairs having the same correlation coefficient (0.40), the portfolio variance is: σ 2 = 50(0.02) 2 (0.30) 2 + [(50) 2 – 50](0.02) 2 (0.40)(0.30) 2 =0.03708 σ = 0.193 = 19.3% c. For a fully diversified portfolio, portfolio variance equals the average covariance: σ 2 = (0.30)(0.30)(0.40) = 0.036 σ = 0.190 = 19.0%...
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This note was uploaded on 11/09/2010 for the course FINC 2012 taught by Professor Andrew during the Three '10 term at University of Sydney.

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