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.
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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.