Suppose that stocks are exposed to independent risks only so that stock has the following return structure: Rist = mi + ei,t where mi is the average return, and eit is the independent risk. If we construct a portfolio including more and more stocks, the portfolio volatility gradually decreases and eventually converges to zero.

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Suppose that stocks are exposed to independent risks only so that stock has the following return
structure:
Ri,t = mi + ei,t
where mi is the average return, and e¿‚t is the independent risk. If we construct a portfolio including
more and more stocks, the portfolio volatility gradually decreases and eventually converges to zero.
Transcribed Image Text:Suppose that stocks are exposed to independent risks only so that stock has the following return structure: Ri,t = mi + ei,t where mi is the average return, and e¿‚t is the independent risk. If we construct a portfolio including more and more stocks, the portfolio volatility gradually decreases and eventually converges to zero.
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