1. Determine the value of each investment at the end of the first month, and then evenly divide the total amount into the same to investments at the beginning of the second month. Continue doing this for all 60 months (this is called rebalancing an equally-weighted portfolio).

2. Determine the monthly returns of these two portfolios.

Speculate which of the two portfolios should have the lower standard deviation and why.


3. Calculate each portfolio’s standard deviation and compare to your expectations in (ii). How do the portfolios’ standard deviations compare to the standard deviations of the individual securities that comprise the portfolios? Discuss any lessons/insights.


In the above graph, portfolios are formed using an increasing number of securities. Sketch the expected “Total Portfolio Risk” dotted-line if


a. Each additional stock was from the same industry as A&B.

b. Each additional stock was from a different industry than the other stocks.

– Explain why your two graphs are either similar or different from one another.

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