In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(e_i) equal to 18% and 250 securities? A) 1.14% B) 625% C) 0.5% D) 3.54% E) 3.16%

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Quizplus · Accepted Answer

The nonsystematic standard deviation of an equally-weighted portfolio can be calculated using the formula: $\sigma_{p} = \frac{\sigma(e)}{\sqrt{n}}$, where $\sigma(e)$ is the average value of the nonsystematic risk (in this case, 18% or 0.18) and $n$ is the number of securities in the portfolio (250). Plugging in the values, we get $\sigma_{p} = \frac{0.18}{\sqrt{250}} \approx 0.0114$ or 1.14%.

In the APT Model, What Is the Nonsystematic Standard Deviation