As the number of assets increases,the variance of an equally weighted portfolio approaches the average covariance.

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Once a portfolio of risky assets becomes sufficiently large,the individual asset variance has little effect on portfolio variance.It is the covariance between asset returns that takes on greater importance.This is a particularly useful characteristic when it comes to selecting assets for a portfolio.Although an asset may be exceedingly risky,having a very large variance of returns,its covariance with the assets in the portfolio may be such that including the asset in the portfolio reduces the variance of the portfolio as a whole.As the number of assets increases,the variance of an equally weighted portfolio approaches the average covariance.

As the Number of Assets Increases,the Variance of an Equally