Explain why a common stock should be evaluated in a portfolio context as opposed to being...

Explain why a common stock should be evaluated in a portfolio context as opposed to being evaluated in isolation.

Solutions

Expert Solution

A portfolio is group of the securities which are added to a portfolio for the purpose. A portfolio consists of the group of discrete securities which add different risk and return to the portfolio. The portfolio manager evaluates individual security on merit of the benefit it would add to an existing portfolio.

Portfolio attains true diversification only when any addition reduces the portfolio risk or standard deviation and optimizes the return. When we look at a portfolio we look at cumulative return not individual stock returns.

When we evaluate individual security of a portfolio in isolation then sometimes it may appear meaningless but the real advantage of security can be very different when added to a portfolio.

Example: A stock yields a normal return in a normal economic scenario but in bad economy it delivers super normal returns. Then this security would worth a lot for a portfolio and can really be favorite of portfolio managers.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

As opposed to obesity, why is being overweight not necessarily a health risk?

1. Two new issue bonds are being evaluated by a portfolio manager. The first bond is...

1. Two new issue bonds are being evaluated by a portfolio manager. The first bond is a 5-year 3.8% semiannual coupon and the second bond is a 20-year 4.4% semiannual coupon. Both bonds are expected to be issued at par. a. Calculate the modified duration for each bond using a 10bp change b. Calculate the convexity for each bond using a 10bp change. Someone help please!

Why is it important to invest in a diversified portfolio? Which stock risk measure should you...

Why is it important to invest in a diversified portfolio? Which stock risk measure should you care about if you have a diversified portfolio? Can you eliminate all portfolio risk?

Discuss the reason why capital investment projects should be evaluated for risk in the present, and...

Discuss the reason why capital investment projects should be evaluated for risk in the present, and how risk might be involved in future planning and/or forecasting. Pick a typical healthcare project to evaluate and consider the risk factors involved in the situation. How could you determine what is most important and might be the most critical sources of risk? Based on what you find, how would management mitigate those risks?

A company announced a public offering of its common stock. Give 2 reasons why this should...

A company announced a public offering of its common stock. Give 2 reasons why this should raise concern?

A portfolio manager controls $10 million in common stock. In anticipation of a stock market decline,...

A portfolio manager controls $10 million in common stock. In anticipation of a stock market decline, the decision is made to hedge the portfolio using the S&P 500 futures contract. The portfolio's beta is 1.1 and the dividend yield on this portfolio is 3% annually. One S&P 500 futures contract with 90 days to settlement date is traded at 1164.50. The S&P 500 index itself is at 1150. (Use 365 days a year) Calculate the number of futures contracts that should...

You are considering investing in two common stocks holding them in a two-stock portfolio. Stock A...

You are considering investing in two common stocks holding them in a two-stock portfolio. Stock A has an expected return of 10% and a standard deviation of 11.2%. Stock B has an expected return of 16% and a standard deviation of 41.1%. if you invest 34% of your portfolio in Stock A and 66% in Stock B and if the correlation between the two stocks is 0.57, what is the portfolio's expected return and standard deviation? A. 13.96% and 19.93%...

Question