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Suppose there are 500 stocks, all of which have a standard deviation of 0.30, and a...

  1. Suppose there are 500 stocks, all of which have a standard deviation of 0.30, and a correlation with each other of 0.4.

    1. (a) Calculate the variance of an equally-weighted portfolio of n such stocks, for n = 2,4,10, 20,50,100,500. Graph your results.

    2. (b) Does the variance of this portfolio tend to zero as n → ∞ (that is, if there were many more than 500 stocks)? If so, explain why. If not, what does it converge to then?

    3. (c) Repeat the above calculations for the case in which the stocks have a correlation of 0.1. Compare the results from sections (a) and (b).

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