3. Consider what you have learned so far and answer the following. a) How is ins
ID: 2657199 • Letter: 3
Question
3. Consider what you have learned so far and answer the following. a) How is insurance similar to an individual's diversified portfolio? b) Given the importance of diversifying all of your financial assets, is it a good idea to own stock in the company for which you work, even if you own stock in other sectors? Explain why or why not. c) A home is the most valuable asset for a majority of U.S. residents. Why do we not see more diversification in real estate ownership against loss of value due to market Aluctuations? Historically, we think that Americans overinvest in housing.Explanation / Answer
a)
In case of diversified portfolio, it reduces the long term risk and performs similar to the market performance. The diversification of investments in portfolio helps to mitigate the risk when one security in the portfolio does not perform in the way as anticipated. The insurance also provides the protection against the risk which may arise due to uncertain events. Both the diversified portfolio and insurance provides the protection to the investor against the unforeseen risks.
b)
It is always recommended to own the stock of the company in which an employee is working. The employee has better knowledge of the own company’s stock performance as compared to other stocks in the market. The employee will be able to make necessary modification in the portfolio mix given the better knowledge of own company’s stock. The future performance of the company as well as stock will be available with the employee.
c)
The reasons are:
-The market fluctuations are temporary phenomenon and it tends to stabilize after a period of time. And the home equity is the long term investment and the value of house appreciates with the improvement in market prices.
- Houses are the physical assets and carry greater value than the stocks. The stocks are dependent upon the performance of the company. The companies might fail leading to the value of house to zero. But the value of real estate property will be considerable always.
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