Explain why every stock portfolio should include some defensive stocks Explain why the correlation coefficients between securities are the key determinants of a portfolios degree of diversification An investment advisor recently met with one of his clients He typically invests in a master list of 30 equities drawn from several industries As the meeting concluded, the client made the following statement I trust your stock picking ability and believe that you should invest my funds in your five best stocks Why invest in 30 companies when you obviously have stronger opinions on a few of them What should the investment advisor respond to his client a) Contrast the concepts of systematic risk and firm specific risk, and give an example of each type of risk b) Evaluate the clients suggestion Discuss how both systematic and firm specific risk change as the number of securities in a portfolio is increased

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Question: Explain why every stock portfolio should include some defensive stocks. Explain why the correlation coefficients between securities are the key determinants of a portfolios degree

Explain why every stock portfolio should include some defensive stocks.
Explain why the correlation coefficients between securities are the key determinants of a portfolios degree of diversification.
An investment advisor recently met with one of his clients. He typically invests in a master list of 30 equities drawn from several industries. As the meeting concluded, the client made the following statement: I trust your stock-picking ability and believe that you should invest my funds in your five best stocks. Why invest in 30 companies when you obviously have stronger opinions on a few of them? What should the investment advisor respond to his client?

a) Contrast the concepts of systematic risk and firm-specific risk, and give an example of each type of risk.

b) Evaluate the clients suggestion. Discuss how both systematic and firm-specific risk change as the number of securities in a portfolio is increased.

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