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

Finance by Geoffrey

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?

 

  1. 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.

  1. W
  2. 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:

  1. Return on equity.
  2. Quick ratio.
  3. Long-term debt to equity.
  4. 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.