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?

Expert Solution

Market consists of different sectors with different volatility and predictibility. This is always said that we should not keep all eggs in one basket because if the basket will fall, your all eggs will be broken. Same is the case with the portfolio, you should always invest in a diversified portfolio since it minimises your loss when there is downfall in 1 sector like IT, healthcare etc.

Stock risk measure for a diversified portfolio depends upon 2 things i.e. risk and return. Stock risk measures that calculate these two factors together are Treynor, Sharpe and Jensen's Ratio.

There are 2 types of portfolio risk i.e. systematic risk and unsystematic risk. Unsystematic risk can be reduced or removed by diversification of portfolio. But, systematic risk is depended on market factors like political reasons, strike in healthcare sector by doctors, economic breakdown of country etc. which cannot be removed and will definitely affect your portfolio. Since, systematic risk cannot be eliminated, all portfolio risk cannot be eliminated.

jeff jeffy answered 2 years ago

Why, as an investor, should you try to hold a diversified portfolio?

For diversified portfolios, which of the following is (are) false? a. the risk of a portfolio...

For diversified portfolios, which of the following is (are) false? a. the risk of a portfolio is less than the weighted average risk of the individual assets in the portfolio if the correlation coefficient is less than one. b. stock held in isolation is more risky than a stock held in a portfolio c. relevant risk of a stock is its contribution of risk to a portfolio d. the unique risk of a portfolio increases as more companies are added...

Which of the following types of risk is the least important risk for a diversified investor?...

Which of the following types of risk is the least important risk for a diversified investor? A:) systematic risk B:) Undiversifiable risk C:) market risk D:) idiosyncratic risk

As an individual investor, you are attempting to invest in a well- diversified portfolio of mutual...

As an individual investor, you are attempting to invest in a well- diversified portfolio of mutual funds so that you will be somewhat insulated from any type of economic shock that may occur. a. An investment adviser recommends that you buy four different U.S. growth stock funds. Since these funds contain over 400 different U.S. stocks, the adviser says that you will be well insulated from any economic shocks. Do you agree? Explain.

How much should you invest in Y so that your portfolio will have a risk of...

How much should you invest in Y so that your portfolio will have a risk of 13%, given the following: X Y E[r] 8% 18% St.Dev 10% 20% The correlation between the returns of the two assets is 0. Answer in decimal form and, if you have two answers report the one that will produce the higher expected returns.

9) If an investor plans to add a stock to a well-diversified portfolio, the investor should...

9) If an investor plans to add a stock to a well-diversified portfolio, the investor should first consider the ________ risks of that additional stock. A) expected total B) historical total C) systematic D) idiosyncratic E) firm-specific

Which of the following types of risk cannot be eliminated by holding a well-diversified portfolio of...

Which of the following types of risk cannot be eliminated by holding a well-diversified portfolio of investments? A Diversifiable risk B Market risk C Portfolio risk D Answers a. and b. are correct. E Answers b. and c. are correct.

Analyzing a Portfolio You have $100,000 to invest in a portfolio containing Stock X and Stock...

Analyzing a Portfolio You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.7 percent. If Stock X has an expected return of 11.4 percent and a beta of 1.25 and Stock Y has an expected return of 8.68 percent and a beta of .85, how much money will you invest in Stock Y? How do you interpret your answer? What is the...

You are a diversified investor trying to decide whether you should invest in Disney or Amgen....

You are a diversified investor trying to decide whether you should invest in Disney or Amgen. They both have betas of 1.25, but Disney has an R Squared of 73% while Amgen’s R squared is only 25%. Which one would you invest in? A. Disney, because it has the higher R squared B. Amgen, because it has the lower R squared C. You would be indifferent

Which of the following statements is not true regarding diversification? A well-diversified portfolio should earn the...

Which of the following statements is not true regarding diversification? A well-diversified portfolio should earn the risk-free rate of return A well-diversified portfolio’s risk can be measured by beta A well-diversified portfolio has only market risk A well-diversified portfolio has no unique risk A well-diversified portfolio has stocks whose returns are not perfectly correlated

Question