The basic goal of asset diversification is to A) guarantee an overall investment portfolio rate of return that exceeds the average rate of inflation B) reduce the market risk faced by equity holding in the investment portfolio C) reduce the overall investment risk faced by an investment portfolio D) guarantee capital preservation
Added by John P.
Step 1
** Show more…
Show all steps
Your feedback will help us improve your experience
Sri K and 84 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination Fraction of Portfolio in Diversified Stocks Average Annual Return Standard Deviation of Portfolio Return (Risk) (Percent) (Percent) (Percent) A 0 1.50 0 B 25 3.00 5 C 50 4.50 10 D 75 6.00 15 E 100 7.50 20 There is a relationship between the risk of Caroline's portfolio and its average annual return. Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase bonds Sell some of her bonds and use the proceeds to purchase stocks Place the entirety of her portfolio in bonds Accept a lower average annual rate of return The table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a portfolio's return, stays within two standard deviations of its average approximately 95% of the time. Suppose Caroline modifies her portfolio to contain 25% diversified stocks and 75% risk-free government bonds; that is, she chooses combination B. The average annual return for this type of portfolio is 3%, but given the standard deviation of 5%, the returns will typically (about 95% of the time) vary from a gain of to a loss of .
Sri K.
Akash M.
Which of the following statements is TRUE? A. If a portfolio has a positive investment in every asset, the standard deviation of the portfolio can be less than that of every asset in the portfolio. B. Labor strikes and part shortages are examples of market-wide systematic risks. C. Market-wide systematic risks can be significantly reduced by diversification. D. Asset-specific unsystematic risks can be substantially reduced with fewer and less correlated assets in a portfolio.
Dave K.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD