A finished FIN-375 Topic 3 diversification limit demonstration example, recomputing portfolio risk from one holding to fifty, locating the floor correlation sets and tying the remainder to beta. Searches like "fin 375 topic 3 assignment example", "fin375 topic 3 sample" and "fin-375 topic 3 example" land here.
What a finished FIN-375 Topic 3 diversification limit demonstration looks like
The finished demonstration starts from illustrative assumptions: each stock has a standard deviation of 40 percent, and every pair has a correlation of 0.25. One stock carries 40 percent risk. Two equally weighted stocks bring it to about 31.6 percent, five to about 25.3, ten to about 22.8, twenty to about 21.4 and fifty to about 20.6. The curve flattens because each stock's own risk shrinks with every addition while the risk shared through correlation stays, setting a 20 percent floor that more stocks cannot lower. A closing passage names the remainder systematic risk and introduces the capital asset pricing model at a first pass: with an illustrative 3.5 percent risk-free rate and a 6 percent market premium, a beta of 0.8 implies 8.3 percent and a beta of 1.4 about 11.9.
How a FIN-375 Topic 3 example is structured
The demonstration repeats one calculation. Its first paragraph gives the assumptions and why they are simplified: identical stocks isolate the effect of number alone, though real stocks differ. The formula for an equally weighted portfolio's variance is shown once, split into the average own-variance term, divided by the number of holdings, and the average covariance term, which approaches its full value. A table then reports portfolio standard deviation at one, two, five, ten, twenty and fifty holdings and the reduction at each step. A chart of the same figures shows the curve flattening toward 20 percent. A correlation paragraph reruns the limit at 0.5 and at zero to show that the floor depends on how the stocks move together. The last section separates the two kinds of risk and explains why only the surviving kind earns a premium, applying the pricing model to two betas.
Identical stocks to isolate number
Giving every stock the same volatility and correlation removes every difference but count, so the table shows diversification working on its own and nothing else.
Two terms in the variance formula
Each stock's own risk is divided by the number of holdings while the shared term stays nearly whole, and that single line is the entire mechanism.
Most of the benefit arrives early
Going from one holding to ten cuts risk from 40 to about 22.8 percent, while the next forty holdings remove barely two points more.
A floor set by correlation
At a correlation of 0.25 risk cannot fall below 20 percent, at 0.5 the floor rises to about 28.3, and only uncorrelated stocks would diversify away completely.
Paid only for the risk that stays
The example argues that the market prices beta rather than total volatility, since diversifiable risk can be shed at no cost and so earns no premium.
Where marks go in FIN-375 Topic 3
A paper that asserts the benefit of spreading holdings, with no numbers showing how large it is and where it ends, earns the least here, because the claim is true and what is wanted is its shape. Papers that suggest enough holdings remove risk entirely have missed the floor set by shared movement, which survives any number of stocks. A portfolio figure produced by averaging the holdings' volatilities leaves out correlation, the one input that makes diversification work at all. A table with no explanation of why the curve flattens reports a pattern without its mechanism. Introducing beta without connecting it to the risk that survives diversification leaves the pricing model unmotivated. Treating total volatility as what investors are paid for contradicts the demonstration the paper has just run, and one sentence tying the two together separates the strongest papers.
Get a FIN-375 Topic 3 example written to your instructions
Send the FIN-375 Topic 3 instructions and the rubric listed in your classroom, with any data or assumptions your section supplies. We write a custom example to them, with portfolio risk computed across numbers of holdings, the floor located, the effect of correlation shown and the surviving risk tied to beta, in 24 to 48 hours. The first one is free.
FIN-375 Topic 3 questions, answered
Why does adding stocks stop reducing risk?
Because each stock's risk has two parts: movement of its own, which averages away as the portfolio grows, and movement shared with the others, which does not. With a common correlation of 0.25 in the example, the shared part sets a floor of 20 percent. Holdings beyond a few dozen barely move the figure, since only the shared part is left to reduce.
Why does the market pay for beta and not total volatility?
Because risk an investor can remove for free by holding more stocks should not earn a reward, and competition among diversified investors tends to price it out. What remains is exposure to the market as a whole, measured by beta. At a first pass, the capital asset pricing model sets expected return at the risk-free rate plus beta times the market premium, so a beta of 1.4 in the example implies about 11.9 percent.
Does the example recommend how many stocks to own?
No. It demonstrates with idealized stocks how risk falls and levels off, which is the concept FIN-375 tests. Real stocks differ in volatility and correlation, and many investors diversify through funds rather than individual shares. The right mix for your own holdings depends on goals and constraints outside the example, and the demonstration is coursework, not investment advice.