Which one of the following types of securities would you expect to offer the highest return? Diversification is a key part of risk management, with the goal to enhance and preserve your portfolio’s value. How do you calculate variance and standard deviation? … (simple). Portfolio diversification is the investment in several different asset classes or sectors. A controlling interest is generally considered to be more than 50% voting control of the investee. Here we examine the leading investment diversification options. FACEBOOK TWITTER LINKEDIN By Daniel Jark. owning 50 internet stocks is not diversified, but owning 50 stocks from 20 industries is diversified. The current portfolio is made up of the following: Lazer Force Company (Lazer) is a manufacturer of cold medication with a strategic objective of improving operational efficiency. Expected returns are based on the probabilities of possible outcomes. Discover what diversifying your portfolio means, how to do it and what impact it has on your risk-to-reward balance. However, in its implementation, many investors make catastrophic mistakes with too much concentration and others settle for average performance because of over diversification. Diversification works best when assets are uncorrelated or negatively correlated with one another, so that as some parts of the portfolio fall, others rise. What is the expected return for the portfolio? Imagine a long-term investment for 10 years, i.e. the investment contains a mixture of fixed income and equity, Purpose of enhancing the company's operations. Diversification: Diversification is a term used in finance and investments. The benefit of diversification Diversification can help protect you against events that would affect specific investments. one company contracts with another company to provide products or services that might otherwise be performed by in-house employees. calculate variance and standard deviation of stock L and U, observe which is more volatile, and which has a higher expected return. E(RP) = 0.5(0.25) + 0.5(0.2) = 0.125 + 0.1 = 0.225. The following is a list of the four investments and the proposed weightings being considered for two alternative portfolio choices, 1 and 2: Jason McMillan, a client, is looking at his investment portfolio. It can help mitigate risk and volatility by spreading potential price swings in either direction out across different assets. DON'T PUT ALL YOUR EGGS IN ONE BASKET CHIEF, It is an estimate of expected return, E(R). What is the expected return for the portfolio? Covariance and correlation are used to measure the relationship between the returns of two investments. Portfolio diversification concerns with the inclusion of different investment vehicleswith a variety of features. • If all the securities in a portfolio are perfectly positively correlated (that is, +1), then there is no reduction in portfolio risk, since all investments will move in the same direction. Portfolio risk can be mitigated in many ways, but not all portfolio allocations are equally effective. The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets. You are given the following information concerning two investments: Which of the following statements best describes markets that are efficient. Diversification is one of the many advantages of investing in mutual funds and it can help an investor in two ways: instant diversification and portfolio diversification in multiple fund categories. A) Proper diversification can eliminate systematic risk. Improve Portfolio Diversification Using … Finance - Chapter 8: Investing and Portfolio Diversification, Passive investments: return is from interests, dividends, and capital gains (losses) on securities purchased, - income returns and capital gains returns, The balance between the desire for the lowest possible risk and highest possible return, all investments are correctly priced, with prices being neither too high nor too low, larger spread between an investment's lower possible return and highest possible return. strategic alliance between two companies is usually formalized by a business contract, but it is not a legal partnership, agency, or corporate affiliate relationship. If the Bank of Canada reduces interest rates, what is the most likely. • Dividend income is only received when dividends are declared by the Board of Directors. In theory, an investor may continue diversifying his/her portfolio if there are availa… The macroeconomic environment is considered first which has a profound effect on the entire market. 1. Why are realised returns generally not equal to expected returns? Diversification can help manage risk. Portfolio diversification is the investment in several different asset classes or sectors. Naive diversification is best described as a rough and, more or less, instinctive common-sense division of a portfolio, without bothering with sophisticated mathematical models. Portfolio diversification. All investing carries risk, but there is one major way you can reduce risk for your entire portfolio: diversification.While thorough due diligence is a crucial part of successful investing, diversifying your portfolio across many different asset classes and individual securities can help reduce the chances that you lose money on all of your investments at once. 1. Test bank Questions and Answers of Chapter 16: International Portfolio Theory and Diversification Because stocks are generally more volatile than other types of assets, your investment in a stock could be worth less if and when you decide to sell it. Answer 1, 3, 5 other answers are incorrect because investors do not get to choose which securities should be purchased or sold in a professionally managed portfolio The return on a portfolio (RP) is equal to the weighted average of the returns on the assets that make up the portfolio, as shown below in the equation: returns on the portfolio under various states are determined and then the expected return for the portfolio is calculated using the following formula: s2P = P1[RP1 - E(RP)]2 + P2[RP2 - E(RP)]2 + ... + Pi[RPi - E(RP)]2. Stock U correlation indicates that the prices of the investments are not to. Has on your opinion of that company and its future prospects in many ways, but not portfolio! 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