Question

1. What is a generic definition of risk? Explain the concept of risk.
2. Discuss the attributes of a well-diversified portfolio. (Be certain to include the implication of different types of risk in your discussion.)

Answer 1

What is a generic definition of risk? Explain the concept of risk.Discuss the attributes of a well-diversified portfolio. (Be certain to include the implication of different types of risk in your discussion.)

Answer- RISK-The uncertainty with any investment where  the possibility that the actual return on an investment will be different from its expected return is known as risk. A higher risk has the potential of a higher return for example  stock in a start-up has the potential to make an investor very wealthy and a low risk has the potential of a low return. for example such as a U.S. Treasury security, has a low rate of return,

generally two type of risk : systematic and unsystematic risk .

Systematic risk is market risk. The degree to which the stock moves with the overall market is called the systematic risk and beta is represent the systematic risk.

Unsystematic risk is diversifiable risk because it is unique for company and organization such as strike unfavorable litigation, natural catastrophe that can be eliminated through diversification.

Well-Diversified Portfolio- Diversification is a risk management strategy A variety of securities are includes in portfolio is known as well diversified portfolio because the weight of security is small.The risk of a well-diversified portfolio closely the systematic risk and the unsystematic risk. Well diversification can be diversified across all assets classes and with in the classes. Well diversification also can be geographically by investing in both with in country or out side country.

Positive result and the attributes of a well diversified portfolio is :

• diversification in all assets classes like bonds, equity, ETF, cash and short term cash equivalents, real estate, commodities etc.
• foreign diversification.
• A well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction.increases the possibility of making a profit.
• decreases the possibility of losses.
• Reduces portfolio risk
• Hedges against market volatility
• Offers higher returns long-term