Assignment Questions
Q1: Why do most investors prefer to hold a diversified portfolio of securities as opposed to placing all of their wealth in a single asset?
Why do most investors hold diversified portfolios?
Investors hold diversified portfolios in order to reduce risk, to lower the variance of the Portfolio. Variance is considered a measure of risk of the portfolio and is one of the many financial tools used. A diversified portfolio should accomplish this because the returns for the alternative assets should not be correlated so the variance of the total portfolio will be generally reduced.
Why do most investors hold diversified portfolios?
Investors hold diversified portfolios in order to reduce risk, to lower the variance of the Portfolio. Variance is considered a measure of risk of the portfolio and is one of the many financial tools used. A diversified portfolio should accomplish this because the returns for the alternative assets should not be correlated so the variance of the total portfolio will be generally reduced.
Q2: Given the following financial data, compute:
Return on equity.
Quick ratio.
Long-term debt to equity.
Fixed-charge coverage.
| Assets: | |
| Cash | $ 2,500 |
| Accounts receivable | 3,000 |
| Inventory | 6,500 |
| Fixed assets | 8,000 |
| Total assets | $20,000 |
| Liabilities and stockholders’ equity: | |
| Short-term debt | $ 3,000 |
| Long-term debt | 2,000 |
| Stockholders’ equity | 15,000 |
| Total liabilities and stockholders’ equity | $20,000 |
| Income before fixed charges and taxes | $ 4,400 |
| Interest payments | 800 |
| Lease payment | 400 |
| Taxes (35 percent tax rate) | 1,120 |
| Net income (after-taxes) | $ 2,080 |
Q3: Explain the benefits derived from investing in deep discount bonds.
Q4: Explain how to manage bond portfolios and what are the portfolio management strategies.
