Question

Assume N securities. The expected returns on all the securities are equal to 0.01 and the variances of their returns are all equal to 0.01. The covariances of the returns between two securities are all equal to 0.005.

What are the expected return and the variance of the return on an equally weighted portfolio of all N securities?

What value will the variance approach as N gets large?

What characteristic of the securities is most important when determining the variance of a well-diversified portfolio?

Can anyone help wit this question? this teacher is crazy

Answer 1

Step-by-step explanation:

The average covariance between securities will be much more important in determining a portfolio’s risk than the average variance, when the portfolio is “well diversified.”