Posted by : Ali Khan Monday, 8 July 2013

"Diversification and Portfolio Risk "


Ali wants to invest in the stock market while making its total risk zero by creating a unique portfolio. In this mode, he starts from choosing a single stock and adding multiple stocks to this one in order to develop a series of portfolios of his choice. Number of securities range from 1 to 1,000 in the different designed portfolios but he remains unable to get his desired risk level. Despite of rigorous computations, the risk level is still away from zero. 


Required:
Can the total risk of portfolio be reduced exactly to zero? Why or why not? Discuss with conceptual rationale.

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