Portfolio diversification: A large number of stocks all have standard deviation of returns of ?i=40% per year. The pairwise correlation between the returns on any two stocks is ?ij=0.25.
a. How large is the volatility, ?p, of equally weighted portfolios with 2,5, and 10 stocks, respectively?
b. What is the volatility of a perfectly diversified portfolio?
c. What is the implication from question b with respect to the amount of risk that is diversifiable in the market?