Question

A diversified financial conglomerate has six units (subsidiaries), with each unit focusing on its own specialization:

■  thrift operations,

■  consumer finance operations,

■  mutual fund operations,

■  securities firm operations,

■  insurance operations, and

■  consulting for pension funds (managing long-term bond portfolios for some pension funds).

1.            Your assignment is to identify the units that will be less adversely affected by the recession. You believe that the units’ different characteristics will cause some of them to be affected more than others.

2.            Currently, each unit employs economists who develop forecasts for interest rates and other economic conditions. When assessing potential economic effects on each unit, what are the disadvantages of this approach versus having just one economist at the holding company provide forecasts?

Answer 1

Answer(1): Conglomerate- It is the combination of two or more companies, working together for a different business unit.

In this question, mutual fund operations unit will be less adversely affected by the recession. Mutual funds pool the money of investors and invest it into various companies of different sectors. Mutual funds provide benefit of diversification hence risk is diversified so even in the stage of recession or slow down, mutual funds do average or sometimes well. Mutual funds provide the benefit of averaging.

Consulting for pension funds business may be more affected by the recession because bonds have interest rate risk.

Answer(2): Disadvantage is: economists cannot figure out the systematic risk. Systematic risk is the market risk and cannot be controlled. So if the big new comes related to politics, Government, war, natural disaster, financial markets fell down and nobody can stop that. No effective market hypothesis work then.