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1.Investors should be more concerned about the diversifiable risk rather than non-diversifiable risk in their portfolios....

1.Investors should be more concerned about the diversifiable risk rather than non-diversifiable risk in their portfolios. Do you agree with this statement? Explain

2.Internal rate of return is a better capital budgeting technique than Net Present Value. Do you agree with this statement? Explain.

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Answer #1

1). The given statement is not true. Diversifiable risk can be minimized by diversifying the portfolio so that poor return on one asset is offset by high return on another asset. Thus, investors should only be concerned with non-diversifiable risk.

2). The given statement is not true. Internal rate of return (IRR) assumes that cash flwows are reinvested at the IRR only. This is a risky assumption to make as other investments giving the same return as the IRR many not be available. NPV, on the other hand, assumes that the cash flows are invested at the cost of capital which is a more reasonable assumption to make. So, NPV is a better capital budgeting technique thatn IRR.

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