Please try the following exercise on diversification benefits: Consider a sample of 1000 selected stocks, and assume for simplicity that each stock has a standard deviation of 35%. The correlation coefficient between each pair of stocks is 0.3. What is the standard deviation of an equally weighted portfolio of 10 stocks? Solution: o = 0,2129 = 21,29% ii. What is the standard deviation of an equally weighted portfolio of 100 stocks? Solution: o = 0, 1939 = 19.39% iii. What is the standard deviation of an equally weighted portfolio of 1000 stocks? What do you conclude regarding the relationship between number of stocks in a portfolio and portfolio risk? Solution: o = 19.19%. Risk ces as number of stock increases. R1 ENG