Assume there are N securities in the market. The expected return of every security is 10 percent. All securities also have the same variance of 0.0144. The covariance between any pair of securities is 0.0064.

a. What are the expected return and variance of an equally weighted portfolio containing all N securities? Note: The weight of each security in the portfolio is 1/N.

b. What will happen to the variance as N gets larger?

c. What security characteristics are most important in the determination of the variance of a well-diversified portfolio?