Problem 2: You have a portfolio of 4 stocks with equal shares invested in each stock. Variances of individual stocks are the same and equal to 2=16. Correlations between each pair of stocks is .

a) What would be the covariances between each pair of stocks as function of .

b) Find the variance of equally-portfolio of these 4 stocks (again as a function of )

c) What happens to the variance of your portfolio when increases.

d) What would be the variance of your portfolio when = 1. Would it be larger or smaller

than the variance of individual stocks ! = 16?

e) What would be your answer if = 1? Why is this an impossible scenario?