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Investor Diversification
Some investment assets have a diversifiable risk and some have an undiversifiable risk involved. Diversifiable risk is specific to a particular security or sector, so its impact on a diversified portfolio is limited to that particular security (moneyterms.co.uk). For example, a financial crisis in a country can cause diversifiable risk on the investments pertaining to the financial institutions. Undiversifiable risk is the tendency of stock prices to decrease, which is caused by something that affects returns on all stock in the same manner, such as war or an interest rate change (Legal).
A substantial unexpected increase in inflation would be an undiversifiable risk because it is common to an entire class of assets or liabilities, or all the stock on the market. It is also considered a market risk or a systematic risk. The economy expects prices to rise slowly over a period of time. That goes along with the economic growth. A substantial unexpected increase in prices can cause the sales in the economy to slow down because consumers may not view the product as having the value of the unexpected substantial increase in price. This activity affects the revenue in a company, which in turn, affects the stock prices.
A major recession in the economy is an undiversifiable risk because it affects the overall market conditions, more especially when unemployment is on the rise and spending is on a slowdown. Even though different parts of the market will have different affects...
This is another market risk when it comes to investments of stock and other high risk assets.
A major lawsuit against a large publicly traded corporation is a diversifiable risk because it is only against the stock of that specific corporation. Corporations usually expect lawsuits to a certain degree and allow for it in the budget, but a major lawsuit could have substantial damage, depending on the circumstances of the lawsuit. More especially corporations, such as Google, Inc., face this with the assets of patents. The stock prices of these corporations could be affected in major ways if another company wins a lawsuit on infringement of rights against Google, Inc. Or, if someone else tries to use the rights of the patents that are owned by Google, Inc., it could affect the stock price with the legal costs of the battle and the loss of sales resulting from the incident.
The expected rate of return on the market portfolio would be seven percent given that the expected rate of return on asset "i" is 12%, the risk-free rate is 4%, and the beta is 1.2. The risk free rate is four percent given that the expected rate of return on asset "j" is 9%, the expected rate of return on the market portfolio is 10%, and the beta is 0.8.
Determining the beta for a portfolio that contains half the stocks traded on the major exchanges would need to be…
Bibliography
Investopedia. A Beginner's Guide to Hedging. 19 Feb 2010. article. 07 July 2012.
Legal, U.S.. Undiversifiable Risk Law & Legal Definition. n.d. Article. 08 July 2012.
moneyterms.co.uk. Diversifiable Risk. n.d. blog. 08 July 2012.
Investments Assets Stocks A stock is a share of ownership in a company, representing a claim on the company's assets and earnings. The importance of being a shareholder is that the investor has a claim on assets and is entitled to a portion of the company's profits, which may be paid out in the form of dividends (Stock basics, 2011). There are positive and negative aspects to stock ownership. One such positive is
Likewise, a young investor may hold mainly equities. Investor risk tolerance is another impediment to achieving asset class diversification. Investors will low risk tolerance, for example, are unlikely to hold high equity positions and even less likely to utilize more obscure securities like hedge funds. Yet, portfolios without equities may be highly susceptible to changes in the prevailing interest rates and therefore lack diversification. Indeed, for many investors a fully-diversified
Investment and Portfolio Analysis With the increasing economic downturn in the economy, the need of investment has increased considerable. The potential investors generally foregoes their current leisure and earnings and investment their earnings and expect to earn benefits in future for the same. For analyzing the investment, we have taken into consideration a hypothetical investor who has $50,000 which needs to be invested in different, in different assets. Investment is one of the
29% 2.1 Man Group 12.56% 12.94% 2.34% 1.5 Marks & Spencer Group 4.60% 17.10% 8.33% 0.8 Meggitt 2.62% 65.59% 4.64% 1.0 Morrison (Wm) Supermarkets 3.66% 13.23% 7.00% 0.4 3.05% 69.65% 25.61% 0.6 Old Mutual 3.24% 26.38% 0.41% 1.5 Pearson 3.77% 50.96% 8.51% 0.8 Petrofac Ltd. 2.15% 62.80% 11.03% 1.5 Prudential 3.47% 14.73% 0.54% 1.6 Randgold Resources Ltd. 0.45% 20.71% 14.89% 0.4 Reckitt Benckiser Group 3.57% 0.00% 12.35% 0.6 Reed Elsevier 4.10% 54.47% 34.72% 0.8 Resolution Ltd. 8.21% 0.00% -0.05% 1.0 Rexam 3.43% 23.66% 6.14% 0.8 Rio Tinto 2.66% 15.32% 4.87% 1.7 Rolls-Royce Holdings 2.16% 33.86% 5.18% 2.1 RSA Insurance Group 8.88% 15.67% 1.89% 1.0 SABMiller 2.01% 23.13% 6.16% 1.0 Sage Group 3.39% 6.89% 0.9 Sainsbury (J) 5.00% 11.50% 5.61% 0.8 Schroders 2.68% 8.82% 2.27% 1.4 Schroders (Non-Voting) 3.45% 8.82% 2.27% 0.8 Severn Trent 4.18% 7.81% 3.56% 0.4 Smith & Nephew 1.81% 41.03% 12.26% 0.8 Smiths Group 3.52% 44.25% 10.58% 1.1 Standard Chartered 3.20% 13.15% 0.81% 1.3 Standard Life 6.25% 12.32% 0.19% 1.1 Tate & Lyle 3.44% 16.67% 5.34% 0.6 Tesco 4.49% 16.36% 5.62% 0.7 Tullow Oil 0.83% 30.01% 6.10% 1.3 United Utilities Group 5.05% 7.08% 4.91% 0.4 Vedanta Resources 2.79% 13.60% 2.67% 2.2 Vodafone Group 5.25% 13.41% 5.27% 0.4 Whitbread 2.44% 17.73% 8.01% 0.8 Wolseley 1.91% 14.80% 3.44% 1.3 WPP 2.93% 73.30% 3.34% 1.2 Optimal Portfolio After carefully analyzing the table 1 and calculating the financial measures of all stocks in Table 1, we select one high performing stock from every industry listed to have well diversified portfolio. Based on our
Investments are the assets or items purchased with the anticipation to generate the income in the future. In the economic sense, investments refer to the goods and services purchased and not consumed today for the purpose of generating wealth in the future. Similarly, going to a university or building a factory to produce goods and services are the examples of investments. Within a financial environment, investors purchase assets with the
investment management in the financial sector. The paper highlights the world's present macroeconomic situation. It further details the macro economic situation and the way it affects investment decisions in several investors. In addition, the paper describes a sample investment programme and provides critical decisions to investors as well as investment vehicles used by the investment moguls. The paper summarises practical exercises in compound investment management growth and the use