Suppose that the standard deviation of returns for a typical share is about .4 (or 40%) a year. Assume the correlation between the returns of each pair of shares is about .3.

a) Calculate the variance and standard deviation of the returns on a portfolio that has equal investments in two shares, three shares, and so on, up to 10 shares.

b) Use your estimates to draw a graph with the number of shares on the x-axis, the standard deviation on the y-axis. What is the underlying market risk that cannot be diversified away?

c) Repeat (a) and (b) given a correlation of 0.