Question

4. Explain briefly the concept of dversification in an investment portfolio. In addition, explain the relationship between a diversified portfolio and the maxim portfolio compared to a portfolio that focuses on only three assets. (3 marks) um possible returns from such a 5. You and your sister have come up with a new business to provide wedding photography services. Both of you have invested $20 000 capital into the business. To gain further funding for this business, identify and briefly explain two possible sources. (4 marks)

Answer 1

4) The concept of diversification is that the returns from a diversified portfolio will be more stable and balanced and would come with less volatility or fluctuations. The relationship would be inverse between the volatility of returns of a concentrated portfolio and that of volatility of returns in a diversified portfolio. For example the volatility of a diversified portfolio would be low while for a concentrated portfolio compriisng of three assets, the volatility is expected to be high.

5) Two possible source of funding:

a) Take bank loans against collateral or guarantee by the founding members.

b) Another source of funding could be to dilute our stake and get funding from strategic investors who are willing to take partial ownership of the firm against providing funds to invest in the business.