Richards & Co

Essay

Richards & Co.Analysts has recently published a study claiming that the benefits to diversification are constant.In other words, adding one more stock to a three stock portfolio will have the same impact as adding one more stock to a 500‐stock portfolio.You are not convinced and you decide to evaluate the claim.
a .Assume that all the stocks have the same standard deviation, 10.0%, and all are independent (correlation equals 0.0).Create equally weighted portfolios of 1 to 10 stocks and calculate the standard deviation for each portfolio.Graph the portfolio standard deviation as a function of the number of stocks.Based on the results of your analysis, evaluate the Richard & Co.Analysts ' claim.
b .As the number of firms increases, what do you expect will happen to the risk of the portfolio? Can the risk of the portfolio come close to zero?