4) Suppose each stock in a portfolio has returns (over the upcoming year) of R = BRm + e, i=1,2,.n Where Rm is the market return with variance Vm and e, is an idiosyncratic shock with mean zero and constant variance S for all i. As a reminder idiosyncratic shocks are uncorrelated with all other shocks and returns. If a, <1 is asset i's value share of the n stocks (that is if it equals .1 it it's value is 10% of the n asset total) what is the variance of a value weighted portfolio of all the stocks? Suppose the stocks had equal value - what is the variance now? What does this say about diversified portfolios?

4) Suppose each stock in a portfolio has returns (over the upcoming year) of R = BRm + e, i=1,2,.n Where Rm is the market return with variance Vm and e, is an idiosyncratic shock with mean zero and constant variance S for all i. As a reminder idiosyncratic shocks are uncorrelated with all other shocks and returns. If a, <1 is asset i's value share of the n stocks (that is if it equals .1 it it's value is 10% of the n asset total) what is the variance of a value weighted portfolio of all the stocks? Suppose the stocks had equal value - what is the variance now? What does this say about diversified portfolios?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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