Diversification

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Show your work for each problem.

1.
What is the main purpose of diversification in investing?
1. a)To avoid paying taxes
2. b)To invest only in stocks
3. c)To reduce risk by spreading investments
4. d)To maximize returns at any cost
2.
A portfolio has 60% stocks and 40% bonds. If all weights must sum to 100%, what is 0.60 + 0.40?
3.
Which correlation value indicates the BEST diversification benefit?
1. a)+1.0
2. b)+0.8
3. c)+0.2
4. d)-0.5
4.
Calculate the weighted return:
5.
A portfolio has 60% stocks (8% return) and 40% bonds (4% return). Calculate the expected portfolio return.
6.
Which portfolio is TRULY diversified?
1. a)50% Apple stock, 50% Microsoft stock
2. b)80% bank stocks, 20% insurance stocks
3. c)100% in 20 different tech companies
4. d)40% stocks, 30% bonds, 20% real estate, 10% gold
7.
A portfolio has 70% stocks (10% return) and 30% bonds (4% return). What is the expected return in percent?
8.
Calculate the expected return for a portfolio with: 50% US stocks (9%), 30% European stocks (6%), 20% bonds (3%).
9.
Why should investors regularly rebalance their portfolios?
1. a)To maximize returns regardless of risk
2. b)To impress their friends
3. c)To maintain the intended risk level as assets grow at different rates
4. d)To avoid paying taxes
10.
An index fund has 30% tech (which falls 50%) and 70% other sectors (which stay flat). What is the fund's total percentage loss?
11.
Portfolio A (100% stocks) returns: Year 1: +20%, Year 2: -30%, Year 3: +25%. If you start with 10,000 euros, what is your final amount (rounded to nearest euro)?
12.
Portfolio B (50% stocks, 50% bonds) over 3 years: Stocks: +20%, -30%, +25%. Bonds: +4%, +5%, +3%. Starting with 10,000 euros, what is the final amount?
13.
Which risk can diversification NOT eliminate?
1. a)Systematic risk (market-wide recessions)
2. b)Currency risk in a single country
3. c)Risk specific to one company
4. d)Risk of one sector underperforming
14.
If a portfolio has weights of 25%, 35%, and 40%, do they sum to 100%?
1. a)No, they sum to 110
2. b)Cannot be determined
3. c)Yes, 25 + 35 + 40 = 100
4. d)No, they sum to 90
15.
A diversified portfolio has: US 40% (-3% return), Europe 35% (+7% return), Asia 25% (+5% return). What is the overall return?
16.
A 60/40 portfolio grows: stocks 60% → 75% of portfolio, bonds 40% → 25%. To rebalance back to 60/40 with 100,000 euros total, how much needs to move from stocks to bonds?