In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(e_i) equal to 20% and 40 securities? A) 12.5% B) 625% C) 0.5% D) 3.54% E) 3.16%

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Quizplus · Accepted Answer

The nonsystematic standard deviation of an equally-weighted portfolio can be calculated using the formula: σ(eP) = σ(ei) / √n, where σ(ei) is the average value of the nonsystematic standard deviation of individual securities, and n is the number of securities in the portfolio. Given σ(ei) = 20% and n = 40, σ(eP) = 20% / √40 = 3.16%.

In the APT Model, What Is the Nonsystematic Standard Deviation