Question

# ANSWER QUESTIONS 3 PLEASE Expected Rate of return Scenario Probability T-Bills S&P 500 Utility Company High-Tech...

 Expected Rate of return Scenario Probability T-Bills S&P 500 Utility Company High-Tech Company Counter-Cyclical Company Recession 20% 5% -10% 6% -25% 20% Near Recession 20% 5% -6% 7% -20% 16% Normal 30% 5% 12% 9% 15% 12% Near Boom 10% 5% 15% 11% 25% -9% Boom 20% 5% 20% 14% 35% -20%

Based on the above returns, Jenna calculated the betas of the three stocks as follows:

Beta of Utility Company = 0.22

Beta of High-Tech Company = 2.02

Beta of Counter-Cyclical Company = -1.13

Imagine you are Jenna. Prepare a report for Kevin to help him understand the concepts of risk and return. Include the following things in your report (don’t just copy from the textbook, explain things in your own words):

3) How would you demonstrate the meaning and advantages of diversification to Kevin?

Ans 3) Diversification: It means that diversifying the portfolio among different asset class or stocks. By diversifying one can reduce the risk due to unforseen or adverse market conditions. It generally reduce the standard deviation of portfolio if the stocks are not perfectly correlated. By diversifying one can be less affected by adverse market conditions.

1. If stocks are not perfectly correlated then it will reduce the risk of the portfolio.

2. It produces higher risk adjusted return.

3. Help in designing optimal portfolio.

4. Helps in generating positive return over the year even market conditions are bad due to presence of the conter cyclical company in the portfolio.

5. One can rebalance portfolio with change in market conditions and earn more return.

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