Question

Question 1:

a) Using an example, discuss how diversification of investments affects the riskiness and expected rate of return of a portfolio.

b) Explain how COVID-19 impacts the profitability, liquidity, and cash flow projections of businesses.

Answer 1

A. Diversification of investment will be lowering the overall unsystematic risk associated with the investment and it will also a lower the overall expected rate of return associated with investment because when the risk will be lower, the overall return will be lower.

If I have to give an example then, if I am managing my portfolio of two stocks particularly Tesla and Apple then I will be having a higher unsystematic risk,but if I add five more stocks to it and if apple and Tesla give negative return then I will still be having a chance of making positive return through other 5 stocks, so it will be leading to a probability of lowering the risk .

B. Covid-19 has impacted the profitability and liquidity along with cash flow projection of the business on the way downside, because there is lack of availability of credit due to projection of lower growth rate in the economy and it will also mean that there is a risk related to insolvencies of business due to lack of repayment and the default rate has increased so there has been a lack of liquidity as well it can be seen that various Central Bank has lowered their rate of interest in order to stimulate the economy.

the overall cash flow associated with the projection of the business has also gone down because there has been a risk of default by many companies and the overall revenues has also gone down in the future because of tough economic conditions all across the globe.