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Problem 5: Diversification Assume you have N stocks 2 =16. Correlations between each pair of stocks is = 0.125 = 1/8. a) What would be
Problem 5: Diversification Assume you have N stocks 2 =16. Correlations between each pair of stocks is = 0.125 = 1/8. a) What would be pairwise covariances? b) What would be the variance of an equally-weighted portfolio of N stocks c) Using Excel calculate the variance you found in b) for N=1,2,3,, 30 stocks and plot it d) Calculate the % of total portfolio variance coming from pairwise covariances and also plot it as a function of N for N=1,2,3,, 30. Comment on your results.
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