What is the volatility of perfectly diversified portfolio

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Portfolio diversification: A large number of stocks all have standard deviation of returns of ?i=40% per year. The pairwise correlation between the returns on any two stocks is ?ij=0.25.

a. How large is the volatility, ?p, of equally weighted portfolios with 2,5, and 10 stocks, respectively?

b. What is the volatility of a perfectly diversified portfolio?

c. What is the implication from question b with respect to the amount of risk that is diversifiable in the market?

Reference no: EM131087972

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