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Unit 7: Efficient Market Theory
2. The correlation among stock returns is falling (the solid upper line represents monthly Notes
data, the lower line daily data):
3. The effects of #1 and #2 cancel each other out. Consequently, the overall volatility of the
market has not changed:
4. However, also because of #1 and #2 the number of stocks necessary to eliminate
nonsystematic risk is rising (the upper curve represents the more recent period):
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