Question

3. We have 10 stocks with the same standard deviation of 20%. Assume CAPM market beta...

3. We have 10 stocks with the same standard deviation of 20%. Assume CAPM market beta captures all undiversifiable risk.

a. If all 10 stocks all have zero market beta, what is the standard deviation of an equally-weighted portfolio of these 10 stocks?

b. If all 10 stocks all have a market beta of 1, what is the standard deviation of an equally-weighted portfolio of these 10 stocks?

Homework Answers

Answer #1

3. A. If all the stock will be having similar zero beta, it will mean that all are risk free Assets and there will not be any standard deviation in the portfolio and standard deviation will be zero.

B. When all the the stock have a market beta of one, it will mean that they are all following up with the market index, then standard deviation will be the derivation of the market return and it will have a a standard deviation of 20% which is similar for all these stock.

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