Richards & Co

question 83

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 percent,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:

Total Market Output

The total quantity of goods or services produced and offered for sale within a market by all firms.

Downward Sloping

A graphical representation indicating that one variable decreases as another increases, commonly used to describe demand curves in economics.

ATC Curves

Short for Average Total Cost curves, these are graphical representations showing how the average cost of production per unit changes with the level of output.

Industry Expands

Refers to the growth in size or scope of a particular sector of the economy, characterized by increased output, employment, or number of businesses.