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II. Portfolio Theory 8. Optimal Risky Portfolio The McGraw−Hill Companies, 2001           CHAPTER 8 Optimal Risky Portfolios 249       E-INVESTMENTS: RISK COMPARISONS Go to www.morningstar.com and select the tab entitled Funds. In the dialog box for se- lecting a particular fund, type Fidelity Select and hit the Go button. This will list all of the Fidelity Select funds. Select the Fidelity Select Multimedia Fund. Find the funds top 25 individual holdings from the displayed information. The top holdings are found in the Style section. Identify the top five holdings using the ticker symbol. Once you have obtained this information, go to www.financialengines.com. From the Site menu, select the Forecast and Analysis tab and then select the funds Scorecard tab. You will find a dialog box that allows you to search for funds or individual stocks. You can enter the name or ticker for each of the individual stocks and the fund. Com- pare the risk rankings of the individual securities with the risk ranking of the fund. What factors are likely leading to the differences in the individual rankings and the overall fund ranking?           APPENDIX A: THE POWER OF DIVERSIFICATION   Section 8.1 introduced the concept of diversification and the limits to the benefits of diver- sification resulting from systematic risk. Given the tools we have developed, we can re- consider this intuition more rigorously and at the same time sharpen our insight regarding the power of diversification. Recall from equation 8.10 that the general formula for the variance of a portfolio is   n n p wi wj Cov(ri , rj) (8A.1) j 1 i 1 Consider now the naive diversification strategy in which an equally weighted portfolio is constructed, meaning that wi 1/n for each security. In this case equation 8A.1 may be rewritten as follows, where we break out the terms for which i j into a separate sum, not- ing that Cov(ri, rj) 2.

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