With reference to the “Hockey Exercise”, are the “mutual funds” diversified?
Note that in the NHL a team plays the other 4 members of its division 5 times during the season, the other 10 members of its conference 5 times, and the teams from the other conference either 1 or 2 times. This question is tougher than it looks. Most students recognized the idea that buying a division or conference is low risk – since owning two teams that play each other guarantees you a minimum of 1 point per share from the game. But … that isn’t quite the same thing as being diversified: diversification leads to low risk, but low risk does not always mean diversified. The real question for diversification is the correlation of the premiums of the underlying shares (and your answer about risk-free rates on Homework 4 should tell you that in this exercise returns and premiums are the same thing). The lower that is, the more diversified you are. The only way to address this is either to keep track of a few days worth of play, or to simulate a small hypothetical league in a spreadshee
