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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. .....
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 Fall '10
 Henn
 Variance

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