Question

Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify...

Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of these firms are expected to be low.

0 0
Add a comment Improve this question Transcribed image text
Answer #1

For better performance and return from market it is required that there is diversification in the portfolio. Diversification is not limited only to investment of different sectors in market but it also considered investing in different types of assets in order to minimise the potential risk involved in the market.

Therefore, Diversification refers to invest in different class of assets in the financial market like shares, bonds, commodity, and real estate etc. And each of the assets are not correlated or little correlated with each other. Otherwise risk of one asset will also affect the investment in other correlated assets.

As per statistics, Correlation may be of three types between the assets of financial market like completely correlated denoted (+1), completely random correlation which is denoted by (0), and completely non-correlated which is denoted by (-1). Therefore, we have to avoid investment in completely correlated assets of the financial market to avoid or to reduce the systematic and unsystematic risk involved in the market.

Gold Extraction Companies are generally considered as not correlated or little correlated companies with the overall stock market. These companies have very low correction with the overall stock markets because in case of adverse situation in overall market, investor think to invest in gold of commodity market or gold extraction companies of share market. Gold and Gold Extraction Companies will provide good returns to investors even in adverse condition in financial market, Gold is one of the investment which is relatively safe and provide high returns. Thus withdrawn money from the share market is invested in gold by investors. Thus Gold prices and companies related to extraction of gold have very less correlation to the gold.

Add a comment
Know the answer?
Add Answer to:
Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • od The capital asset pricing model (CAPM) explains how risk should be considered when stocks and...

    od The capital asset pricing model (CAPM) explains how risk should be considered when stocks and other assets are held -Select- The CAPM states that any stock's required rate of return is -Select the risk-free rate of return plus a risk premium that reflects only the risk remaining -Select- diversification. Most individuals hold stocks in portfolios. The risk of a stock held in a portfolio is typically -Select the stock's risk when it is held alone. Therefore, the risk and...

  • Consider the following 6 months of returns for 2 stocks and a portfolio of those 2​...

    Consider the following 6 months of returns for 2 stocks and a portfolio of those 2​ stocks: The portfolio is composed of​ 50% of Stock A and​ 50% of Stock B.   a. What is the expected return and standard deviation of returns for each of the two​ stocks? b. What is the expected return and standard deviation of returns for the​ portfolio? c. Is the portfolio more or less risky than the two​ stocks? Why? this is the entire question...

  • Consider the following information for three stocks, A, B, and C. The stocks' returns are positively...

    Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between O and 1 ExpectedStandard Stock Retum Deviation Beta 1.0 10% 1.0 1.4 10% B10% 12% 20% 12% Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free...

  • 2. Portfolio risk and diversification A financial planner is examining the portfolios held by several of...

    2. Portfolio risk and diversification A financial planner is examining the portfolios held by several of her clients. Identify which of the following portfolios is likely to have the smallest standard deviation: A portfolio with 10 randomly selected stocks from U.S. and international markets A portfolio with 10 randomly selected international stocks A portfolio with 10 randomly selected U.S. stocks Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors....

  • 3. Portfolio risk and diversification Aa Aa A financial planner is examining the portfolios held by...

    3. Portfolio risk and diversification Aa Aa A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation ? A portfolio with 10 randomly selected international stocks A portfolio with 10 randomly selected U.S. stocks A portfolio with 10 randomly selected stocks from U.S. and international markets Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several...

  • 3. Portfolio risk and diversification Aa Aa E A financial planner is examining the portfolios held...

    3. Portfolio risk and diversification Aa Aa E A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation? O O O A portfolio containing only Chevron stock A portfolio consisting of about 30 energy stocks A portfolio consisting of about 30 randomly selected stocks Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors....

  • 15. How does the diversification of a portfolio change its expected returns and expected risks? Is...

    15. How does the diversification of a portfolio change its expected returns and expected risks? Is this in principle any different for internationally diversified portfolios? 16. What types of risk are present in a diversified portfolio? Which type of risk remains after the portfolio has been diversified? 17. If all national markets have market risk, is all market risk the same? 18. If an investor is able to determine a global beta for his portfolio and holds a portfolio that...

  • 2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk and Rates of Return:...

    2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk and Rates of Return: Risk in Portfolio Context The capital asset pricing model (CAPM) explains how risk should be considered when stocks and other assets are held . The CAPM states that any stock's required rate of return is the risk-free rate of return plus a risk premium that reflects only the risk remaining diversification. Most individuals hold stocks in portfolios. The risk of a stock held in...

  • Consider the following 6 months of returns for 2 stocks and a portfolio of those 2...

    Consider the following 6 months of returns for 2 stocks and a portfolio of those 2 stocks Note: The portfolio is composed of 50% of Stock A and 50% of Stock B a. What is the expected return and standard deviation of returns for each of the two stocks? b. What is the expected return and standard deviation of returns for the portfolio? c. Is the portfolio more or less risky than the two stocks? Why? a. What is the...

  • Instructions: The focus of this lab is portfolio theory and the impact of diversification. Use Microsoft...

    Instructions: The focus of this lab is portfolio theory and the impact of diversification. Use Microsoft Excel to complete this assignment. Submit your Excel file and Word file online in Blackboard for grading. There are up to 5 points possible to Exam 1. Due by Friday, Ianuary.25, 2019 by 11pm. Absolutely, no late work will be accepted. Suppose you have the following information about two securities St Expected Sta Return Deviation 20% 45% 1. Using Microsoft Excel, create a spreadsheet...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT