Explain how a diversified portfolio can reduce fluctuations in returns even when the economy as a whole is experiencing contractions and expansions.
What will be an ideal response?
If an investor divides the holdings among various companies, then the investor’s portfolio may perform satisfactorily even if one company goes broke. Moreover, if one company specializes in producing luxury items, which do well in prosperous periods but very badly during recessions, and another company sells inexpensive items, economic fluctuations will impact these companies in opposite directions. In effect, the “ups” and “downs” will offset each other. If an investor holds stock in both companies, the investor’s overall risk is obviously less than if the investor owned stock in only one. All other things being equal, a portfolio containing many different types of securities tends to be less risky and feature less fluctuations in returns than a portfolio with fewer types of securities
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The four largest firms in an industry account for the following value of industry sales: 12 percent, 8 percent, 5 percent and 4 percent. Calculate the four-firm concentration ratio. Would this industry be regarded as competitive or concentrated?
What will be an ideal response?
Which of the following will shift the production possibilities curve to the right?
A. An increase in the unemployment rate from 6 to 8 percent. B. A decline in the efficiency with which the present labor force is allocated. C. A decrease in the unemployment rate from 8 to 6 percent. D. A technological advance that allows farmers to produce more output from given inputs.