David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After each security was added, David calculated the portfolio standard deviation,

rp.

The calculated values are shown in the following table:

Number of

securities

Portfolio

risk, rp

Number of

securities

Portfolio

risk, rp

1

18.20%

11

7.70%

2

16.50%

12

7.10%

3

14.90%

13

6.50%

4

13.30%

14

6.00%

5

12.30%

15

5.70%

6

11.50%

16

5.50%

7

10.70%

17

5.30%

8

10.10%

18

5.25%

9

9.30%

19

5.20%

10

8.60%

20

5.15%

Plot the data from the table on a graph that has the number of securities on the

x-axis

and the portfolio standard deviation on the

y-axis.

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 David Talbot's portfolio?

a. and b. Which of the following graphs represents the portfolio risk data given above?