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%...
View
Full
Document
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.
 Three '10
 Andrew

Click to edit the document details