Why do most investors hold diversified portfolios?

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?

1. 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
alternativeassetsshouldnotbecorrelatedsothevarianceofthetotalportfoliowillbe
generally reduced.
2. W
1. 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
alternativeassetsshouldnotbecorrelatedsothevarianceofthetotalportfoliowillbe
generally reduced.
2.
Q2: Given the following financial data, compute:
a. Return on equity.
b. Quick ratio.
c. Long-term debt to equity.
d. 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.

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