Finance Principles Essay Essay example
Undergraduate
Essay
Finance & Accounting
Pages 4 (1004 words)
Download 0
Finance principles Contents Risk 3 Diversification 3 Theoretical concepts underpinning portfolio diversification 4 Measurement of the benefits of Diversification 5 Limitations 6 Risk The potential that a particular activity or a certain type of action will lead to an outcome that is undesirable is called risk…

Introduction

Diversification A technique of risk management that takes into account a broad selection of investments within a portfolio is called diversification. (Lakshmanan and Amer-Yahia, n.d.). 1The rationale that guides this technique argues that a portfolio consisting of different kinds of investment on an average will give higher returns as well as pose a lower risk compared to any other individual investment that is found within the portfolio. As a result the positive performance of some investments will rule out the not so positive or negative performance of the other investments. The benefits from the process of diversification can only be accrued if the securities within the portfolio are perfectly uncorrelated. The first form of diversification takes place when the company has the potential to develop beyond the existing product market. The related form of diversification can be further categorized into backward diversification, forward diversification and horizontal diversification. Unrelated diversification takes place when an organization has the potential to develop interests that is complementary to its existing activities. When a company involved in media services can think of diversification in financial services, such kind of diversification is called unrelated diversification (Chatterjee and Wernerfelt, 1991). ...
Download paper
Not exactly what you need?

Related papers

Principles of Finance
The composition and determination of the perfect capital structure has been an integral subject of research in corporate finance. The Nobel Prize winner theorem presented by Modigliani and Miller is the cornerstone of capital structure in today’s world. The crux of the theory is that under an effective market where there are no taxes, insolvency costs, agency costs, and asymmetric information,…
Principles of finance.
In this case, the debtor is the companies in question. In most cases, this is termed as assets granted, particularly by the creditor to the debtor. The debtor agrees to repay the debt with an interest. Some companies use debt as part of their strategy in corporate finance. Before the debt is issued, both parties have to agree on the standard of deferred payment. In most cases, this repayment is in…
Principles of Finance Paper
Discussion The first principle discusses the competitive financial environment. This principle outlines four factors that affect the business environment. These are: the principle of self-interest behaviour, the principle of two-sided transactions, the signalling principle and the behavioural principle (Emery, Finnerty and Stowe, 2007). The principle of self-interest means that the company will…
Finance Principles
It can be explained as, if one of the asset in the portfolio is giving negative return, then it would not have a significant impact on the overall return of the portfolio because the other assets might be performing well and thus making up for the asset which is not performing well. Diversification helps an investor to have consistent return on its portfolio over a period of time. An investor who…
Finance Principles
An investor will thus, take care of the rate of return to expect and the risk level exposed in the capital market in making a decision on stock and bond allocation. Equity and bond portfolio investment in U.S capital market: Equity investment; An equity investment is supposed to provide long term value growth and the possibility of dividend income. The value of shares can at some time become…
Essay on Principles of Finance
Honda Motor Corp. from Japan is considered as the fifth largest motorcycle manufacturer and auto-maker in the world. The company has a sustainable financial condition because it has posted a profit of ?234.4 billion, which is about US$2.7 billion in its first quarter of 2011. Moreover, the company has also posted a profit of ?135.92 billion in quarter 2. Honda has a huge market share in the Asian…
Finance Principles
Stakeholders include all individual and institutions that are financially and non financial associated with the company i.e. from board of directors and top management to shareholders, creditors, suppliers, employees, society and the environment (Ross, Westerfield, & Jordan, 2008, p.7). Corporate governance policies are developed and implemented by mainly the board of directors and top management…