The Markowitz Portfolio Approach Says That Diversification of Assets Diminishes

Question

Examlex · Accepted Answer

The Answer is The Markowitz model considers the interaction between a firm's assets and determines that the lower the correlation coefficient between those asset,the less transaction risk that the firm faced.That means that if the primary assets of a firm are essentially the same,the risk that the firm will suffer losses in the short term in transactions involving those assets will increase.The more diversification in a firm's assets,the lower the correlation coefficient and the lower the firm's transaction risks will be.For instance,if a firm is heavily invested in corporate bonds,a change in the value of the currency in which those bonds are denominated could mean significant losses for the firm because it has significant assets that are all subject to the same risks.On the other hand,if a firm has some investments in corporate bonds but other investments in production equipment,a change in the value of the currency in which the bonds are denominated could cause the firm to incur a loss,but that change in currency value would likely not have an adverse effect on the firm's investment in production equipment.The key point of the Markowitz Portfolio Approach is to diversify to reduce risks.

The Markowitz Portfolio Approach Says That Diversification of Assets Diminishes

Essay

Correct Answer:
Verified

The Markowitz Portfolio Approach Says That Diversification of Assets Diminishes

Essay

Correct Answer:VerifiedShow Answer

Correct Answer:
Verified