1.You are offered the chance to flip the coin 100 times. You would win $200 dollars for each heads, and pay $160 pays for each tails. The expected return is (50 heads*$200) + 50 tails(-$160) = $2000. It is possible that you would flip 100 straight heads and win 20,000 dollars or flip 100 straight tails and pay 16,000, but the odds are extremely low. In reality the probability is that you probably throw around 50 heads and 50 tails and make a positive return. Use the coin flip example to show why diversification lowers risk without sacrificing expected return.

2.Why are there diminishing returns to diversification? That is, as you add more stocks, the marginal benefits go down. Why?