One of the most important investment concepts is diversification, and yet it's also one of the...

One of the most important investment concepts is diversification, and yet it's also one of the most overlooked.

a. Explain, in your own words, how investing in a portfolio of securities will reduce risk.

b. Why there are a couple risks diversifiable and a couple risks non-diversifiable?

c. Provide an example of each one.

Solutions

Expert Solution

A. investment in the portfolio of securities is leading to lowering the overall risk associated with investment because it will eliminate the firm specific risk because when we are investing into a large number of companies, it will mean that the risk associated with the individual company is reduced and eliminated to a large extent so it is always better to scatter the investment into a large group of Company in order to eliminate the risk associated with an systematic risk and it will help the investor to diversify his portfolio.

B. risks are diversifiable because they are related to the company specific factors and Company can control it to a large extent whereas there are many factors which are beyond the control of the company and they can never be controlled so they are non-diversifiable.

C. Risks which are diversifiable risk are related to lack of demand of a product and risk related to employee turnover in a particular company

Risks which are non diversifiable are related to changes in the interest rates in the economy and changes in the political structure in the economy.

jeff jeffy answered 2 years ago

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