Explain the difference between required rate of return and expected rate of return. If they are different at a specific point in time, what does it mean?
2. What is the difference between an expected return and a total holding period return?
3. How does investing in more than one asset reduce risk through diversification?
Answer preview
According to Goetzmann, & Kumar (2008), diversification is a technique where an individual invests in more than one portfolio. An investor can diversify his or her portfolio by investing in a variety of stocks such as bonds, stocks, property and so forth. Also, an investor may invest in different countries or regions. The risk reduces with an increase in the number of portfolios. Naturally, some value of some assets will rise while others will decline. Therefore, investing in different assets will offset the decline in other assets value. For instance, some assets
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