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If a stock portfolio is well-diversified, then the portfolio variance:

A. Will equal the variance of the most volatile stock in the portfolio.

B. Maybe less than the variance of the least risky stock in the portfolio.

C. Must be equal to or greater than the variance of the least risky stock in the portfolio.

D. Will be a weighted average of the variance of the individual securities in the portfolio.

E. Will be an arithmetic average of the variances of the individual securities in the portfolio.

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Egie Boy Cauba
Egie Boy CaubaLv5
28 Jan 2021

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Assume N securities. The expected returns on all the securities are equal to 0.01 and the variances of their returns are all equal to 0.01. The covariances of the returns between two securities are all equal to 0.005.

1.What are the expected return and the variance of the return on an equally weighted portfolio of all N securities?

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i.What are the expected return and the variance of the return on an equally weighted portfolio of all N securities? Please, note that the variance is presented by the formula, which depends on N.

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i.What are the expected return and the variance of the return on an equally weighted portfolio of all N securities? Please, note that the variance is presented by the formula, which depends on N.

ii.What value will the variance approach as N gets large?

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