Need help on Portfolio Risk

Our Lecturer has not explained Portfolio Risk in sufficient detail when there is a positive correlation.

Can anyone give me the formula for this question please:

A portfolio has 12 exposures – each of which has an expected loss of £ 400,000 with a total loss probability of 0.2. There is also a correlation of +.4 between each pairing.

Calculate the overall portfolio risk.

Explain and illustrate how this portfolio risk can be reduced.

roger9 said:

Our Lecturer has not explained Portfolio Risk in sufficient detail when there is a positive correlation.

Can anyone give me the formula for this question please:

A portfolio has 12 exposures – each of which has an expected loss of £ 400,000 with a total loss probability of 0.2. There is also a correlation of +.4 between each pairing.

Calculate the overall portfolio risk.

Explain and illustrate how this portfolio risk can be reduced.

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I apologize for not giving a better answer, but it has been many years since I studied this stuff. I'd start with reviewing your text or course materials for the exact formula or for a reference to the exact formula required for your class. I know: you are asking for the formula, but I doubt that there is such a thing: different people make different assumptions and so generate somewhat different formulas. One formula (probably deriving from Markowitz) is probably still standard, but may not be universal. Moreover, I am quite sure that one step will be to find the individual variance of the exposures, and there does not seem to me to be sufficient information given to do so.

Sorry to be so little help.

Thank you for your reply, I will email my lecturer to make sure of the formula.