LG5
LG5
CHAPTER 5 Risk and Return 255d. Explain why the two returns are different. Which one is more important to
Joe? Why?5–16 Total, nondiversifiable, and diversifiable risk David Talbot randomly selected
securities from all those listed on the New York Stock Exchange for his portfo-
lio. He began with a single security and added securities one by one until a total
of 20 securities were held in the portfolio. After each security was added, David
calculated the portfolio standard deviation, kp.The calculated values are shown
in the following table.a. On a set of “number of securities in portfolio (xaxis)–portfolio risk (yaxis)”
axes, plot the portfolio risk data given in the preceding table.
b. Divide the total portfolio risk in the graph into its nondiversifiableand diver-
sifiablerisk components and label each of these on the graph.
c. Describe which of the two risk components is the relevant risk,and explain
why it is relevant. How much of this risk exists in David Talbot’s portfolio?5–17 Graphical derivation of beta A firm wishes to estimate graphically the betas
for two assets, A and B. It has gathered the return data shown in the following
table for the market portfolio and for both assets over the last ten years,
1994–2003.Actual return
Year Market portfolio Asset A Asset B1994 6% 11% 16%
1995 2 8 11
1996 13 4 10
1997 433
1998 80 3
1999 16 19 30
2000 10 14 22
2001 15 18 29
2002 8 12 19
2003 13 17 26Number of Portfolio Number of Portfolio
securities risk, kp securities risk, kp1 14.50% 11 7.00%
2 13.30 12 6.80
3 12.20 13 6.70
4 11.20 14 6.65
5 10.30 15 6.60
6 9.50 16 6.56
7 8.80 17 6.52
8 8.20 18 6.50
9 7.70 19 6.48
10 7.30 20 6.47