Just as the formula for variance in the two-asset case is computed from a 22 matrix, the variance formula is computed from an NN matrix in the N-asset case. We showed that with a large number of assets, there are many more covariance terms than variance terms in the matrix. In fact the variance terms are effectively diversified away in a large portfolio, but the covariance terms are not. Thus, a diversified portfolio can eliminate some, but not all, of the risk of the individual securities.

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