Why do most investors prefer to hold a diversified portfolio of securities as opposed to placing all of their wealth in a single asset?

Investments FIN403

Assignment Questions

Q1:  Why do most investors prefer to hold a diversified portfolio of securities as opposed to placing all of their wealth in a single asset?

Why do most investors hold diversified portfolios?

Investors hold diversified portfolios in order to reduce risk, to lower the variance of the

Portfolio. Variance is considered a measure of risk of the portfolio and is one of the many financial tools used. A diversified portfolio should accomplish this because the returns for the alternative  assets  should  not   be  correlated   so  the   variance   of  the total portfolio will be generally reduced.

Why do most investors hold diversified portfolios?

Investors hold diversified portfolios in order to reduce risk, to lower the variance of the

Portfolio. Variance is considered a measure of risk of the portfolio and is one of the many financial tools used. A diversified portfolio should accomplish this because the returns for the alternative  assets  should  not   be  correlated   so  the   variance   of   the   total  portfolio   will  be generally reduced.

 

Q2: Given the following financial data, compute:

Return on equity.

Quick ratio.

Long-term debt to equity.

Fixed-charge coverage.

 

Assets:  
Cash $ 2,500
Accounts receivable 3,000
Inventory 6,500
Fixed assets 8,000
Total assets $20,000
   
Liabilities and stockholders’ equity:  
Short-term debt $ 3,000
Long-term debt 2,000
Stockholders’ equity 15,000
Total liabilities and stockholders’ equity $20,000
   
Income before fixed charges and taxes $ 4,400
Interest payments 800
Lease payment 400
Taxes (35 percent tax rate) 1,120
Net income (after-taxes) $ 2,080

 

 

Q3: Explain the benefits derived from investing in deep discount bonds.

 

Q4: Explain how to manage bond portfolios and what are the portfolio management strategies.