MediumPortfolio & Risk
The Diversification Floor
BlackRockAQR Capital
Every stock in a large universe has volatility 20%, and every pair has correlation 0.25. As you equal-weight more and more of them, portfolio volatility falls toward a floor. What is that floor, in percent?
Approach
With many names, only the average covariance survives.
Floor = σ√ρ.
Answer
Show the final answer
The answer is 10. Sign in free for the full worked solution and to check your own answer.
Related problems
Sharpe RatioEasyTwo-Asset Portfolio VolatilityMediumCVaR / Expected ShortfallMediumDiversification & SharpeMediumMinimum-Variance WeightMediumPortfolio BetaEasy
More in Portfolio & Risk.