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Suppose there are five stocks, each with a beta of one, and with uncorrelated idiosyncratic risk equal to 2% each. The market portfolio has variance

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Suppose there are five stocks, each with a beta of one, and with uncorrelated idiosyncratic risk equal to 2% each. The market portfolio has variance 9%. What is the variance of an equally weighted portfolio in the five stocks? Now suppose the idiosyncratic risk of stock number one increases from 2% to 3%, and the idiosyncratic risk of stock number two decreases from 2% to 1%. What would happen to your portfolio? Would you like to increase your investment in stock number two and decrease your investment in stock number one? Explain

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