Richards & Co

question 77

Essay

Richards & Co.Analysts has recently published a study claiming that the benefits to diversification are constant.In other words, adding one more stock to a three stock portfolio will have the same impact as adding one more stock to a 500‐stock portfolio.You are not convinced and you decide to evaluate the claim.
a .Assume that all the stocks have the same standard deviation, 10.0%, and all are independent (correlation equals 0.0).Create equally weighted portfolios of 1 to 10 stocks and calculate the standard deviation for each portfolio.Graph the portfolio standard deviation as a function of the number of stocks.Based on the results of your analysis, evaluate the Richard & Co.Analysts ' claim.
b .As the number of firms increases, what do you expect will happen to the risk of the portfolio? Can the risk of the portfolio come close to zero?

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Definitions:

Gini Ratios

A measure of income inequality within a population, ranging from 0 (perfect equality) to 1 (perfect inequality), where a higher Gini coefficient indicates higher inequality.

Income Inequality

The uneven distribution of income within a population, leading to gaps between the wealthiest and poorest individuals.

Standard Census

A government-enumerated survey conducted at regular intervals that collects comprehensive demographic, social, and economic data about the population.

Income Distribution

Describes how a country's total GDP is spread amongst its population, affecting wealth disparity and economic stability.