50.1K

Verified Solution

Link Copied!

Suppose that the standard deviation of returns from a typical share is about 0.35 (or 35%) a year. The correlation between the returns of each pair of shares is about 0.2. a. Calculate the variance and standard deviation of the returns on a portfolio that has equal investments in 2 shares, 3 shares, and so on, up to 10 shares. (Use decimal values, not percents, in your calculations. Do not round intermediate calculations. Round the "Variance" answers to 6 decimal places. Round the "Standard Deviation" answers to 3 decimal places.) No. of Shares Variance Standard Deviation(%) 1 2 3 4 5 6 7 8 9 10 b. How large is the underlying market variance that cannot be diversified away? (Do not round intermediate calculations. Round your answer to 3 decimal places.) Market risk c. Now assume that the correlation between each pair of stocks is zero. Calculate the variance and standard deviation of the returns on a portfolio that has equal investments in 2 shares, 3 shares, and so on, up to 10 shares. (Use decimal values, not percents, in your calculations. Do not round intermediate calculations. Round the "Variance" answers to 6 decimal places. Round the "Standard Deviation" answers to 3 decimal places.) No. of Shares Variance Standard Deviation(%) 1 2 3 4 5 6 7 8 9 10

Answer & Explanation Solved by verified expert

See Answer