Consider an equally weighted portfolio that contains 100 stocks.If the average volatility of these stocks is 50% and the average correlation between the stocks is .7,then the volatility of this equally weighted portfolio is closest to:
A) 0.72
B) 0.59
C) 0.40
D) 0.50

Question

Quizplus · Accepted Answer

B) Variance of an equally Weighted Portfolio = 11ea7e5a_6e67_e40d_9a0a_1fde07d24ad7_TB1623_11 (Average Variance of Individual Stocks) + (1 - 11ea7e5a_6e67_e40e_9a0a_3f3282c7446b_TB1623_11 )(Average covariance between the stocks) Var = (1 / 100)(.50)² + (1 - 1 / 100)(.7)( 11ea7e5a_6e68_0b1f_9a0a_e19f6a60c32f_TB1623_11 ( 11ea7e5a_6e68_0b20_9a0a_8f63e2c51a59_TB1623_11 ) Var = .01(.25) + .99(.7)(.50) = .349 stdev = 11ea7e5a_6e68_0b21_9a0a_8f18f6b6c829_TB1623_11 = .5908

Consider an Equally Weighted Portfolio That Contains 100 Stocks