P5.20 For his portfolio, Jack Cashman randomly selected securities from all those listed on the New York Stock Exchange. He began with one security and added securities one by one until a total of 20 securities were held in the portfolio. After each security was added, Jack calculated the portfolio standard deviation, sp. The calculated values follow. Number of Securities Portfolio Risk, Sp (%) Number of Securities Portfolio Risk, Sp (%) 1 14.50 11 7.00 10 234567890 13.30 12 6.80 12.20 13 6.70 11.20 14 6.65 10.30 15 6.60 9.50 16 6.56 8.80 17 6.52 8.20 18 6.50 7.70 19 6.48 7.30 20 6.47

a. On a set of axes showing the number of securities in the portfolio (x-axis) and port- folio risk, sp (y-axis), plot the portfolio risk data given in the preceding table.

b. Divide the total portfolio risk in the graph into its nondiversifiable and diversifiable risk components, and label each of these on the graph.

c. Describe which of the two risk components is the relevant risk, and explain why it is relevant. How much of this risk exists in Jack Cashman's portfolio?