Question

Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the...

  1. Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now​ invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here:

Island

Burger

Fink

Roland

Ratio

Electric Utility

Heaven

Software

Motors

Current ratio

1.06

1.35

6.79

4.55

Quick ratio

0.92

0.87

5.23

3.73

Debt ratio

0.69

0.45

0.04

0.34

Net profit margin

6.25%

14.33%

28.46%

8.43%

Assuming that his uncle was a wise investor who assembled the portfolio with​ care, Robert finds the wide differences in these ratios confusing. Help him out.

  1. Why​ wouldn't investors invest all of their money in software companies instead of in less profitable​ companies? (Focus on risk and​ return.) (Select all the answers that​ apply.) (0.25 Marks)
  1. Software companies tend to carry large debt which represents senior claims on the​ companies' assets.
  2. Investors​ wouldn't invest all of their money in software companies because their average collection period is usually very high.
  3. By placing all of the money in one​ stock, the benefits of reduced risk associated with diversification are lost.
  4. Although the software industry has potentially high profits and investment return​ performance, it also has a large amount of uncertainty associated with the profits.

Homework Answers

Answer #1

a). Investors won't put all money into software companies because:

- By placing all of the money in one​ stock, the benefits of reduced risk associated with diversification are lost. (investing in a single sector is risky as diversification won't happen.)

-Although the software industry has potentially high profits and investment return​ performance, it also has a large amount of uncertainty associated with the profits. (High return comes with high risk so putting all money in one stock is not the wisest move.)

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