Because the diversification benefit fromadding another asset declines as thetotal number of assets in the portfolioincrease, most diversification benefitcan be achieved with as few as 15 or 20assets.O TrueO False Investment grade bonds have arisk of default and ratedor above,while junk bonds haverisk ofdefault and are ratedor below.O low, BBB, high, BBO high, BBB, low, BBO low, B, low, CCCO low, A, high, BBB

Diversification means adding different type of assets in your portfolio so as to bring down the standard deviation of returns.(1): TRUE This is because the conventional view in finance and in domain of investing is that optimal level of diversification can be achieved by an investor with around 15 to 20 assets that are spread across different types of industries and different asset class. The conventional view holds that holding large number of different type of assets (like more than 20 assets) in the portfolio will only lead to compounding of problems for investors. (2): The answer is the first option - low, BBB, high, BB Explanation: Investment grade bonds are those bonds that have low risk of default and have a rating of BBB (S&P rating) or higher (or Baa3 on Moody’s). Credit risk is low for such bonds. Junk bonds carry vary high risk of credit default. Their rating is BB or lower (S&P) and Ba or lower (Moody’s). Hence the 2nd and 3rd options are incorrect as they say that risks of junk bonds are low. The last option is also incorrect as BBB is the minimum rating of investment grade bonds.

Answered: Because the diversification benefit…

Business

Finance

Because the diversification benefit from adding another asset declines as the total number of assets in the portfolio increase, most diversification benefit can be achieved with as few as 15 or 20

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Discuss why it is advisable to invest in a group of financial assets rather than investing in just one, even if this, on average, has offered a high historical return (generally, above the market return).
A declining trend in the capital outlay ratio could be an indicator of deferred replacement of capital assets. O Truc O False pt
None
If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the latter years has the higher net present value. OTrue O False
Combining two or more assets in an investment portfolio will typically lead to diversification benefits.(i) What is the benefit of diversification?(ii) What is the general condition under which diversification will have benefits? Briefly explain why.
Which of the following statements is true? Multiple Choice When NPV is 0, the IRR is equal to the discount rate. When NPV is 0, the investment is not making a profit. In calculating IRR, we make the assumption all cash flows are reinvested at the discount rate. NPV is a good measure to use when comparing investments of different sizes.
Which of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.
According to the Capital Asset Pricing Model (CAPM), an asset with negative beta: a. Cannot exist b. Is expected to earn a negative return c. Should be short sold d. Will not be included in the market portfolio e. None of the above
Explain the unique risk and the market risk. What risk can be reduced when you diversify your portfolio by investing across many different assets?
When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.True or False
1. Why can’t diversification reduce systematic risk? 2. Why are sunk costs excluded when conducting a capital budgeting analysis?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS