Question
I cannot understand how the formula Corr = SD(Rp)/SD(Ri) derived in solution of b. Consider an equally weighted portfolio of stocks in which each stock
I cannot understand how the formula "Corr = SD(Rp)/SD(Ri)" derived in solution of b.
Consider an equally weighted portfolio of stocks in which each stock has a volatility of 50%, and the correlation between each pair of stocks is 24%.
a. What is the volatility of the portfolio as the number of stocks becomes arbitrarily large?
b. What is the average correlation of each stock with this large portfolio?
Solution( I can't understand b)
a. Avg cov = 50% x 50% x 24% = 6.00
Limit Vol = (0.06)0.5 = 0.2449 = 24.49%
b. Corr = SD(Rp)/SD(Ri) = 24.49%/50% = 48.98%
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