Example Consider a portfolio of large stocks selected randomly from the stock market. The historical volatility of the return of a typical large firm in the stock market is about 40%, and the typical correlation between the returns of large firms is about 28%. Then, SD(Rp) = / () (0.4)2 + (1 - 1) (0.28) (0.4)2 As n 00, SD (Rp) V(0.28)(0.4)2=0.2117->21.17% This risk is not diversified away. My question- where does the last ".4" come from? Shouldn't that be the product of the standard deviations of the stocks