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.
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.
