(a) Briefly explain the concept of diversification. In your discussion, you should explain why the standard...

(a) Briefly explain the concept of diversification. In your discussion, you should explain why the standard deviation of a portfolio of two securities can be less than the weighted average of the standard deviations of the individual securities.

(b) Explain the differences between the capital market line and the security market line.

Expert Solution

A) The concept of diversification advocates that when there are are higher number of assets which are added into the portfolio that will be leading into elimination of unsystematic risk out of the portfolio and that will be providing the benefits of diversification into the stock portfolio.

diversification will be meaning that when there would be allocation of portfolio into different asset classes for different securities that will be eliminating the risk of company specific in nature so that will be making the portfolio less risky and more return worthy.

it can also be said that diversification will be completely eliminating the unsystematic risk of the portfolio and unsystematic risk will always be having a large significance in the portfolio formation.

Standard deviation of a Portfolio of two securities can be less than the weighted average of standard deviation of individual security because when both the securities are merged together in a Portfolio, then unsystematic risk related to both these securities are eliminated to a higher extent and that would be leading to a lower amount of risk present in the portfolio and due to the lower risk, there would be lower standard deviation because standard deviation is a reflection of the total risk of the portfolio.

B) differences between capital market line and security market line are as follows-

A. standard deviation will be the measure of risk in capital market line where the beta coefficient will be determining the risk factor of security market line.

B. capital market line is the line which will be showing the rate of return which will depend upon risk free rate and security market line is a graphical representation of market risk and return at a given time

C. capital market line is considered to be superior when measuring the risk factors than the security market lines

D.capital market line will be plotting efficient portfolio whereas security market line will be plotting efficient as well as non efficient portfolio

E. Market portfolio and risk free assets are determined by capital market line and all the security assets are determined by security market line.

jeff jeffy answered 2 years ago

Concept-Discussion 1 - Explain why the standard deviation would likely not be a reliable measure of...

Concept-Discussion 1 - Explain why the standard deviation would likely not be a reliable measure of variability for a distribution of data that includes at least one extreme outlier. Concept-Discussion 2 - Suppose that you collect a random sample of 250 salaries for the salespersons employed by a large PC manufacturer. Furthermore, assume that you find that two of these salaries are considerably higher than the others in the sample. Before analyzing this data set, should you delete the unusual...

Briefly describe the concept of the black swan. Explain why you either support or dismiss the...

Briefly describe the concept of the black swan. Explain why you either support or dismiss the concept of the black swan. Describe a personal or work-related example/evidence to support your opinion. Explain why you believe the example you provided was or was not unforeseeable. Explain how formal risk management may increase awareness and control over risks.

Briefly explain why you should not heat organic solvents over a Bunsen burner flame. you should...

1. Briefly explain why (a) you should not heat organic solvents over a Bunsen burner flame. (b) you should add activated carbon to a cool solution and then heat the mixture to boiling rather than add the carbon to a boiling solution. 2. Indicate a procedure to solve the following recrystallization problems, (a) oiling out (b) lack of crystal formation (c) presence of colored impurities (d) premature recrystallization in the funnel stem during gravity filtration

Why we can achieve diversification benefits by including multiple securities in the portfolio? Your discussion must...

Why we can achieve diversification benefits by including multiple securities in the portfolio? Your discussion must include the underlying drivers of diversification. Your answer can include statistical measures and examples.

Discussion Form: 1. Explain why LIFO is not used in process costing? 2. Explain the concept...

Discussion Form: 1. Explain why LIFO is not used in process costing? 2. Explain the concept of equivalent units of production? 3. What is the difference between FIFO method and Average Cost method? 4. Explain the purpose of break-even analysis?

In this threaded discussion, your initial post in this discussion you should have two paragraphs. Your...

In this threaded discussion, your initial post in this discussion you should have two paragraphs. Your first paragraph should... Identify the thing or concept of the model of the market you have found most difficult to master/understand Now explain to your classmates why you had difficulty with this concept. Your second paragraph should... Explain what you did to be able to understand/get your head around this concept.

Briefly explain the importance of international expansion as a viable diversification strategy.

a. With reference to the concept of 'afinity maturation', briefly explain why IgG and IgA antibodies...

a. With reference to the concept of 'afinity maturation', briefly explain why IgG and IgA antibodies are generally of higher afinity than IgM antibodies. b. Despite this, IgM antibodies can be very effective in activating complement and promoting phagocytosis of bacteria. Provide an explanation for this observation.

Briefly explain the concept of "Credible Commitment"

Discussion "The Concept of Locus of Control" - Explain the concept of locus of control. Using...

Discussion "The Concept of Locus of Control" - Explain the concept of locus of control. Using yourself or someone you know well, describe and discuss how a person's locus of control positively or negatively impacts his or her ability to assess and cope with stress. Discuss a situation that proves what you are saying is true. How can one move along the locus-of-control continuum for more external to more internal control?

Question