Accounting
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?
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
alternative assets should not be correlated so the variance of the total portfolio will be
generally reduced.
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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
alternative assets should not be correlated so the variance of the total portfolio will be
generally reduced.
Q2: Given the following financial data, compute:
Return on equity.
Quick ratio.
Long-term debt to equity.
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.
