This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: the same size, and you are adding up more (N) of them, but each one is divided by Nsquared. So as N approaches infinity, the second term gets smalleventually small enough to ignore. .. An even funnier thing happens if we consider the variance of a portfolio made up of a large number of stocks (N large), for which the average beta happens to be one. Then the first term is simply sigmasquaredm, and the second term is negligible: the variance of the portfolio is the variance of the "market" Conclusion: If an investor is doing his or her jobtrying to get to a portfolio that has the minimum risk for a given expected returnthen "idiosyncratic" risk can be diversified away: by putting all your eggs into many baskets, you essentially eliminate any idiosyncratic risk factors from your portfolio. Hence a security's "riskiness"from the point of view of its impact on the overall riskiness of your portfolio as a wholeis summarized by its beta. .....
View
Full
Document
This note was uploaded on 11/10/2011 for the course GEB GEB1011 taught by Professor Henn during the Fall '10 term at Broward College.
 Fall '10
 Henn

Click to edit the document details