answer with 100 words 1.Investors should be more concerned about the diversifiable risk rather than non-diversifiable...

answer with 100 words

1.Investors should be more concerned about the diversifiable risk rather than non-diversifiable risk in their portfolios. Do you agree with this statement? Explain

2.Internal rate of return is a better capital budgeting technique than Net Present Value. Do you agree with this statement? Explain.

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Expert Solution

1: Ans - I don't agree with the statement. Diversifiable risks are unsystematic risks, that is company specific risk. Company specific risk may be due to poor management, internal issues, fraud etc. So if you build a portfolio with different assets, then the unsystematic risks can be diversified. It means it is quite unlikely that all the companies will indulge in fraud at the same time. So buying different securities with low correlation between themselves, eliminates diversifiable risk. On the other hand, the non-diversifiable risk in the systematic risk. Systematic risk is the risk of market not performing well. So an investor should be compensated for the Non-Diversifiable risk that he is taking.

2:Ans - I don't agree with the statement:

Mostly IRR and NPV give the same Accept / Reject decision for a project. There may be times when they may differ.

The prime objective for the management should be to increase the wealth of shareholders. NPV shows the exact value by which the shareholders wealth will be increased if the management accepts the project. Usually the management should accept all the projects with positive NPV, but due to budget constraints, the management accepts the project with highest NPV. IRR shows the internal rate of return, it doesn't give an idea to investors regarding the actual increase in wealth in dollar terms. So NPV is better.

jeff jeffy answered 1 year ago

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