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1.Suppose that the average stock has a volatility of 50%, and that the correlation between pairs of stocks is 20%. Estimate the volatility of an equally weighted portfolio with (a) 1 stock, (b) 30 stocks, (c) 1000 stocks.
2.What is the volatility (standard deviation) of an equally weighted portfolio of stocks within an industry in which the stocks have a volatility of 50% and a correlation of 40% as the portfolio becomes arbitrarily large?
3.Consider an equally weighted portfolio of stocks in which each stock has a volatility of 40%, and the correlation between each pair of stocks 20%.
a. What is the volatility of the portfolio as the number of stocks becomes arbitrarily large?
b. What is the average correlation of each stock with this large portfolio?
4.Stock A has a volatility of 65% and a correlation of 10% with your current portfolio. Stock B has a volatility of 30% and a correlation of 25% with your current portfolio. You currently hold both stocks. Which will increase the volatility of your portfolio: (i) selling a small amount of stock B and investing the proceeds in stock A, or (ii) selling a small amount of stock A and investing the proceeds in stock B?
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