SeanWest

Because with a lower avg correlation the are greater possible benefits of diversification. With avg corr of 0.1 the maximum benefits of diversification is equal to 10% of the avg variance. so 110% would be 11% of the average variance. with p = 0.5 the maximum benefits of diversification are 50% of the avg variance... therefore 110% would be 55% of the average variance.


because the lower correlation stocks have such greater potential diversification benefits the portfolio requires a larger # of these stocks in order to achieve these benefits.