In Figure, why does the line decline steeply at first and then flatten out? The standard deviation
Question:
The standard deviation of a portfolio tends to 60% decline as more stocks are added to the portfolio. The standard 50% deviations of AMD and American Airlines stocks are 56.4% and 47.8% 40% respectively when they are held in isolation However, the standard 30% deviation of a portfolio containing equal investments in both stocks is just 45%. The portfolio is less volatile than either stock in the 10% portfolio. The risk that diversification eliminates is called unsystematic 0% risk. The risk that remains, even in a diversified portfolio, is called systematic risk Portfolio Standard Deviation Advanced Micro Devices Advanced Micro Devices + American Airlines Advanced Micro Devices + American Airlines + Wal-Mart Portfolio of 11 Stocks unsystematic 20% standard deviation of entire stock market-19.8% systematic 2 6 9 10 1 12 7 Number of Stocks 0
Step by Step Answer:
Figure declines steeply at first and then flattens out because as we add more stocks to a ...View the full answer
Introduction to Corporate Finance
ISBN: 978-0324657937
2nd edition
Authors: Scott B. Smart, William L Megginson
Related Video
Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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