Explain how the number of assets in a portfolio affects the portfolio risk.
Explain how the number of assets in a portfolio affects the portfolio risk.
Homework Answers
The number of securities in the portfolio determines the risk exposures as well as the diversification pattern of a portfolio.As there are more of the Securities present in the portfolio, the firm specific risks gets minimized as the portfolio is not concentrated. Firm specific risks gets minimized through diversification into a large number of asset in the portfolio which are significant of different sectors of the economy. As the numbers of assets in the portfolio increases the correlation among assets risk becomes a more important determinant of portfolio risk. Combining assets with correlation reduces portfolio risks. As number of Securitiies added to a portfolio increases,the standard deviation of the portfolio become smaller. Hence investors can make the portfolio risk small by inclusion of a large number of Securities with negative correlation in the portfolio.
Hence we can say that including a large number of assets in the portfolio minimizes the firm specific risks .
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Explain how the number of assets in a portfolio affects the
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