Exhibit 1 Portfolio Risk Reduction Through Diversification Percent risk =Variance of portfolio return Variance of market return 100 80 Total Risk Diversifiable Risk + Market Risk (unsystematic) (systematic) 60 40 Portfolio of U.S.stocks 27% 20 Total risk Systematic risk 10 20 30 40 50 Number of stocks in portfolio By diversifying the portfolio,the variance of the portfolio's return relative to the variange of the market's return (beta)is reduced to the level of systematic risk--the risk of the market itself. 价旺南卧苦黄易大学Exhibit 1 Portfolio Risk Reduction Through Diversification Number of stocks in portfolio 10 20 30 40 50 Percent risk 20 40 60 80 Portfolio of U.S. stocks By diversifying the portfolio, the variance of the portfolio’s return relative to the variance of the market’s return (beta) is reduced to the level of systematic risk -- the risk of the market itself. Systematic risk Total risk 27% 1 Total Risk = Diversifiable Risk + Market Risk (unsystematic) (systematic) = Variance of portfolio return Variance of market return 100