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FIN401-Chapter 6 (exam 2)

Average of the risk of the individual securities in

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Unformatted text preview: of the individual securities in the the portfolio portfolio n σ ≠ ∑ wiσ i=1 2 p 2 i Risk Reduction in Portfolios Risk Assume all risk sources for a portfolio are Assume independent independent The larger the number of securities the The larger smaller the exposure to any particular risk to Only issue is how many securities Only how Risk Reduction in Portfolios Risk Random diversification: Diversifying without looking at relevant investment characteristics relevant Marginal risk reduction gets smaller and smaller Marginal as more securities are added as A large number of securities is not required for significant risk reduction significant International diversification is beneficial International diversification Portfolio Risk and Diversification σp % Portfolio risk 35 20 Market Risk 0 10 20 30 40 ...... Number of securities in portfo...
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