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Accounting Ethics - Term Papers

Accounting Ethics

Rickey Currie
Seminar
2[nd] presentation

Investors are always looking for a way to lower the amount of risk they must take in order to achieve the highest possible return. The problem one will face is in order to achieve the same return but with less risk, one must diversify their portfolio which can be costly.
Prices of securities do not always move in a correlated way, whether they are stocks, bonds, or any other type of security. A price decrease in one security can be offset by a price increase in a different security, and the more securities you mix into a portfolio, the greater the probability of this offsetting price movement. Therefore, by mixing more securities into a ...

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There are two extremely similar toy companies (Company A and Company B), selling similar toys, and both companies' toys are equally popular.
If you do not diversify, you buy stock in only Company A. If a firm specific risk negatively impacts Company A, such as its factory burns down, then you will have a major loss, and investors in Company B will have a major gain since it would become the only toy company left. However, if you diversify and buy stock in both Company A and Company B, then the large loss in Company A will be offset by the equally large gain in Company B. Notice that by diversifying, an investor is able to reduce the unsystematic risk, the risk associated with only a single company (in this case the risk of fire). Systematic risk cannot be eliminated by diversification. For instance, if children no longer like to play with toys, then the entire market for toys has been adversely affected, and not simply an individual firm. In the case of systematic risk, ...

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Accounting Ethics. (2012, November 6). Retrieved December 23, 2024, from http://www.essayworld.com/essays/Accounting-Ethics/101843

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PAPER DETAILS

Added: 11/6/2012 09:34:13 PM
Submitted By: 1jz240sx
Category: Business
Type: Premium Paper
Words: 738
Pages: 3

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