Question

Suppose you invest 50% of your money into the stock of oil and gas, and the other 50% into the stock of apparel (clothing) retail firm. Explain in words how diversification will reduce your total risk exposure.

Answer #1

Diversification is the process of allocating funds in a number of securities which reduces the overall risk. diversification spread the total risk among the number of securities and overall risk of the portfolio reduces. due to diversification company reduces the chance of losing money and it also helps in averaging the returns of the portfolio.

Suppose if all the funds are invested into a single security, then if that security underperform, the value of the invested fund would be reduced and investment would be subject to high degree of risk and chances of losing money would be high while if such funds are invested into more than one stock chances of losing money would be low as risk would be averaged and returns would also be averaged. Thus we can say that diversification is a process through risk can be allocated among the different securities for investment.

You invest 45% of your money in Stock Y and the rest in Stock Z.
The standard deviation of Stock Y's annual returns is 56% and the
standard deviation of Stock Z's annual returns is 44%. The return
correlation between the two stocks is -0.6. By how many percentage
points did diversification reduce your risk in this case? Write
your answer out to three decimals - for example, write 6.2% as
.062.

You invest 58% of your money in Stock A and the rest in Stock B.
The standard deviation of annual returns is 43% for Stock A and 43%
for Stock B. The correlation between the two stocks is -0.1. By how
many percentage points does diversifying between these two stocks
reduce your risk? Go out three decimals - for example, write 5.6%
as .056.

Suppose you invest $1000 of your own money and borrow the
maximum amount available to you on margin and also invest that
money. The initial maintenance requirement is 50%.
(10 points) What is the total amount invested?
(10 points) The asset you purchase immediately goes up 8%. What
is the return on your invested money?
(10 points) Instead of what happens in (b) above, the price of
the asset rises 16% over the first year. You pay 5% interest on...

#13 Suppose you are a director of an energy company that has
three divisions—natural gas, oil, and retail (gas stations). These
divisions operate independently from one another, but all division
managers report to the firm’s CEO. If you were on the compensation
committee, as discussed in Question 1-12, and your committee was
asked to set the compensation for the three division managers,
would you use the same criteria as that used for the firm’s CEO?
Explain your reasoning
Here is...

I- (6 pts) Suppose you have some money to invest-for simplicity,
$1-and are planning to put a fraction
into a stock market mutual fund and the rest ( ), into a bond
mutual fund. Suppose that a $1 invested
in a stock fund yields ??after one year and a $1 invested in a
bond fund yields . ?? and are random
variables with expected value of 9% and 6% respectively, and
standard deviation of 5% and 3% respectively.
The correlation...

f you had $50,000 to invest in the stock market, how would you
go about reducing your risk exposure?

You have $5,000 to invest in a stock portfolio. Your choices are
Stock X with an expected return of 14 percent and Stock Y with an
expected return of 6 percent. If your goal is to create a portfolio
with an expected return of 12.2 percent, how much money will you
invest in Stock X?
If your goal is to create a portfolio with an expected return of
12.2 percent, how much money will you invest in Stock Y?

You have $20,000 to invest in a stock portfolio. Your choices
are Stock X with an expected return of 14 percent and Stock Y with
an expected return of 8 percent.
If your goal is to create a portfolio with an expected return of
10 percent, how much money will you invest in Stock X?
$6,667
$33,333
$7,000
$6,334
$6,934
If your goal is to create a portfolio with an expected return of
10 percent, how much money...

"You have $5,000, which you want to invest in shares of firm A.
The firm has no debt but you prefer 50% debt. If the stock price is
$50 per share, how can you create your homemade leverage?"
Buy 50 shares with your own money and lend $2500.
"Invest $2,500 in stocks of firm A and $2,500 in its bonds.
"
"Invest $5,000 in bonds of firm A. "
"Borrow $5,000 and invest in 200 shares of firm A. "

Suppose you invest 30% of your money in Security A and the rest
in Security B
Security A
Security B
Expected return
15%
10%
Standard Deviation
0.25
0.17
Beta
1.3
1.1
Correlation coefficient
between A and B
0.5
A. What is the expected return of the portfolio?
B. What is the portfolio beta?
C. What is the portfolio variance? Compare it with A and B
variances. Is the portfolio variance larger or smaller than either
A or B variances and...

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