This issue has three parts.

The Security Market Line ties the expected return on stocks to the systematic nondiversifiable risks. The development of the model usually references studies indicating that investors holding as few as 15 stocks effectively reduce the risk of the portfolio down to the systematic level. The compensation for the risk in investment is related to the risk associated with only the element of risk that cannot be diversified away

The Efficient Frontier article, The 15-Stock Diversification Myth, (seehttp://www.efficientfrontier.com/ef/900/15st.htm) discusses results of a recent study on stock variability and diversification. The study by Burton Malkiel in a recent Journal of Finance is summarized in the article along with extended studies by William Bernstein, the author of efficient frontier.

After reading the article answer the following questions:

1. What did Malkiels study of individual stock volatility, correlation of stock returns and overall market volatility show?

2. What are the implications for diversification from these findings?

3. The article also looked at super stock performance and terminal wealth dispersion, as well as systematic standard deviation to measure standard deviation. The measure of terminal wealth dispersion incorporates the impact of variation on the wealth of an investor after investing for a long number of years. What was Bernsteins main conclusion concerning the diversification and the number of securities that would be required to be held?