FIN 403 SEU Holding a Diversified Portfolio of Securities Questions

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Orqbe

Economics

FIN 403

Saudi electronic university

FIN

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Explanation & Answer:
4 Questions
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An Outline of Fin 413 Investment

Answer 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?

Answer Q2: Given the following financial data, compute:

a. Return on equity.

b. Quick ratio.

c. Long-term debt to equity.

d. Fixed-charge coverage

Answer Q3: Explain the benefits derived from investing in deep discount bonds.

Answer Q4: Explain how to manage bond portfolios and what are the portfolio

management strategies.


College of Administrative and Financial Sciences

Assignment-2
Investment (FIN403)
Deadline: (30/10/2022 @ 23:59 PM)

Course Name: Investment
Course Code: FIN403

Student’s Name:

Trimester: 1st

CRN:

Student’s ID Number:

Academic Year: 1443/1444 H, 1st Trimester

For Instructor’s Use only:
Instructor’s Name: Dr Jyoti Agarwal
Students’ Grade: /10

Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY
• This assignment is an individual assignment.
• The Assignment must be submitted only in WORD format via allocated folder
on Blackboard.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented. This also
includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submitted assignments will NOT be entertained.
• Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
Submissions without this cover page will NOT be accepted.

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?

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
Accounts receivable
Inventory
Fixed assets
Total assets

$ 2,500
3,000
6,500
8,000
$20,000

Liabilities and stockholders’ equity:
Short-term debt
Long-term debt
Stockholders’ equity
Total liabilities and stockholders’ equity

$ 3,000
2,000
15,000
$20,000

Income before fixed charges and taxes
Interest payments
Lease payment
Taxes (35 percent tax rate)
Net income (after-taxes)

$ 4,400
800
400
1,120
$ 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.

Answers
Answer 1:
Investments are exposed to various risks due to market uncertainties. Besides,
operational uncertainties can likely impact investments’ efficient and profitable performance.
Therefore, investors perceive diversified securities portfolios to have more returns and
certainty of undisrupted operations. Investment in financial securities is highly beneficial when
the right investment strategies entail reducing the anticipated risks and maximizing expected
return (Lekovic, 2018). Systematic and unsystematic risks exist in financial markets, thus
negatively impacting the expected returns. As a result, holding diverse securities that increase
the expected returns while reducing the chances of the perceived risks affecting the portfolio
becomes beneficial (Lekovic, 2018). For instance, for an investor with five securities held from
different firms in different industries, the chances of all the firms experiencing a drop in their
stock prices are minimized such that even when two of the securities decline, the other three
will generate returns, offsetting the loss generated from the two securities.
Another advantage of holding securities in different portfolios is the increased chances
of gaining from growth opportunities in the different industries with those securities (Dodds,
2022). For instance, the growth in tech companies has led to an increase in their securities,
which avails high returns for investors holding their securities. Market fluctuations do not
affect all industries due to different structures and operations, thus guaranteeing stable returns
to their investors (Dodds, 2022). An example of such firms is Amazon, Alibaba, and other ECommerce firms that recorded a surge in profitability during Covid-19 as other industries
reported high losses to the extent of closing down operations. Therefore, diverse securities
increase the chances of returns while mitigating the downward trend when the market
plummets due to uncertainties. On the other hand, single security is exposed to high...


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