Impact of Diversification on Portfolio Risk and Return

The assignment content discusses various finance-related topics including investor behavior, portfolio management, and company listings. It highlights that investors choose investments with low risk to reduce overall risk and improve returns. The concept of diversification is also discussed, emphasizing its importance in reducing risk and increasing returns. Additionally, the content provides information about prospectuses, ASX listing requirements, and IPO details for Sienna Cancer Diagnostics.

Running head: FUNDAMENTALS OF FINANCE
Fundamentals of finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

FUNDAMENTALS OF FINANCE
1
Table of Contents
Question 1:.................................................................................................................................3
a.i) Savings of Jenifer after 5 years:...........................................................................................3
a.ii) Deposits meet the 20% requirement:..................................................................................3
a.iii) Money she needs to borrow after 5 years to buy the house:..............................................3
b.i) Fortnight instalment amount:...............................................................................................4
b.ii) Repayment made by Jenifer over 20 years:........................................................................4
c.i) Jenifer’s monthly repayment for 10 years loan tenure:.......................................................5
c.ii) Total repayment in 10 years and the interest:.....................................................................5
c.iii) Mentioning that she uses 40% of the average salary after promotion to make the
payment:.....................................................................................................................................6
d.i) Evaluating the new option to meet the requirements of monthly loan amount:..................6
d.ii) Stating whether Jenifer should accept offer from her parents:...........................................6
Question 2:.................................................................................................................................7
a.i) Depicting Portfolio returns of AB:......................................................................................7
a.ii) Depicting Portfolio returns of AC:.....................................................................................7
a.iii) Calculating expected return of Portfolio BC:....................................................................8
b) Mentioning the impact of risk on the portfolio:.....................................................................9
c) Mentioning about diversification in finance and its impact on the portfolio:......................10
Question 3:...............................................................................................................................11
i) Mentioning about prospectus, stating when it is issued, and depicting why it is needed to be
lodged in Australia:..................................................................................................................11
ii) Mentioning the requirements of ASX, while depicting the industry Sienna is listed:........11
iii) Stating the share issue price and mentioning the capital that will be raised from the IPO:
..................................................................................................................................................12

FUNDAMENTALS OF FINANCE
2
iv) Mentioning the process for acquiring shares of Sienna after IPO:.....................................12
v) Mentioning the relevant decision of buying shares in Sienna:............................................12
Reference and Bibliography:....................................................................................................13

FUNDAMENTALS OF FINANCE
3
Question 1:
a.i) Savings of Jenifer after 5 years:
Particulars Amount
Salary per month 6,666.67
number of months in 5 years 60
Interest rate 0.25%
Savings per month 2,666.67
Total savings after 5 years 172,391.23
a.ii) Deposits meet the 20% requirement:
Particulars Amount
Property price 600,000
20% loan requirement 120,000.00
Total savings after 5 years 172,391.23
The total savings is relatively at 172,391.2, which is higher than the 20%
requirements of the bank.
a.iii) Money she needs to borrow after 5 years to buy the house:
Particulars Amount
Property price (A) 600,000
Savings after 5 years (B) 172,391.23

FUNDAMENTALS OF FINANCE
4
Loan amount (C=A-B) 427,608.77
b.i) Fortnight instalment amount:
Particulars Value
N 520
time 20
Interest rate 4%
I 0.15%
Loan amount 480,000.00
Loan Payments 1,341.69
Particulars Value
Annually salary of Jennifer 150,000
Loan instalment (A) 1,341.69
Fortnight savings of Jennifer (B) 2,307.69
Amount after loan repayment (C=B-A) 966.00
b.ii) Repayment made by Jenifer over 20 years:
Particulars Value
Loan instalment (A) 1,341.69
Time (B) 520
Payments provided by Jennifer (C=A*B) 1341.69 * 520
Payments provided by Jennifer (C=A*B) 697,681.11
Loan amount (D) 480,000.00

FUNDAMENTALS OF FINANCE
5
Total interest paid by Jennifer (E=C-D) 697,681.11 -480,000.00
Total interest paid by Jennifer 217,681.11
c.i) Jenifer’s monthly repayment for 10 years loan tenure:
Particulars Value
Loan mount 480,000.00
N 120
Time 10
I 0.33%
Interest rate 4%
Per month loan payments 4,859.77
c.ii) Total repayment in 10 years and the interest:
Particulars Value
Per month loan payments (A) 4,859.77
Time (B) 120
Loan paid by Jennifer (C=A*B) 4,859.77 * 120
Loan paid by Jennifer (D) 583,172.00
Interest paid by Jennifer (E-D-C) 583,172.00 - 480,000.00
Interest paid by Jennifer 103,172.00

FUNDAMENTALS OF FINANCE
6
c.iii) Mentioning that she uses 40% of the average salary after promotion to make the
payment:
Particulars Value
Jennifer Salary 150,000
Average salary (40%) 60,000
Fortnight savings of Jennifer 5,000.00
Per month loan payments 4,859.77
Savings left after loan repayment 5,000.00 - 4,859.77
Savings left after loan repayment 140.23
d.i) Evaluating the new option to meet the requirements of monthly loan amount:
Particulars Value
Monthly rent (A) 2,300.00
Expenses per month (B) 500.00
Total Income (C=A-B) 1,800.00
Loan amount payment (D) 4,859.77
Total balance difference (E=C-D) (3,059.77)
The implementation of the new options will not allow Jennifer to fulfil the monthly
loan obligations, as income is relatively lower than loan payment.
d.ii) Stating whether Jenifer should accept offer from her parents:
The evaluation of the new options mainly states that relevant implications are present,
which directly reduces capability of Jennifer to support its loan obligations.

FUNDAMENTALS OF FINANCE
7
Question 2:
a.i) Depicting Portfolio returns of AB:
Particulars Value
Returns (A) 13%
Returns (B) 17%
Weight (A) 40%
Weight (B) 60%
Correlation (AB) -0.2
Risk (A) 25%
Risk (B) 30%
Variance (W12*Returns A2)+( W22*Returns B2)+(2*W1*W2*Returns
A*Returns B*correlation AB)
Variance (40%2*13%2)+(60%2*17%2)+(2*40%*60%*13%*17%*-0.2)
Variance 1.10%
Portfolio risk √Variance
Portfolio risk √1.10%
Portfolio risk 10.48%
Portfolio return (W1 * Returns A) + ( W2 * Returns B)
Portfolio return (40%* 13%) + ( 60% * 17%)
Portfolio return 15.4%
a.ii) Depicting Portfolio returns of AC:
Particulars Value

FUNDAMENTALS OF FINANCE
8
Risk (A) 25%
Risk (C) 35%
Returns (A) 13%
Returns (C) 22%
Correlation (AC) 0.5
Weight (A) 30%
Weight (C) 70%
Variance (W12*Returns A2)+( W22*Returns C2)+(2*W1*W2*Returns A*Returns
C*correlation AC)
Variance (30%2*13%2)+(70%2*22%2)+(2*30%*70%*13%*22%*0.5)
Variance 3.12%
Portfolio risk √Variance
Portfolio risk √3.12%
Portfolio risk 17.68%
Portfolio return (W1 * Returns A) + ( W2 * Returns C)
Portfolio return (30%* 13%) + (70% * 22%)
Portfolio return 19.3%
a.iii) Calculating expected return of Portfolio BC:
Particulars Value
Risk (A) 35%
Risk (B) 30%
Returns (C) 22%
Returns (B) 17%

FUNDAMENTALS OF FINANCE
9
Weight (C) 50%
Weight (B) 50%
Correlation (BC) 0.6
Portfolio return (W1 * Returns C) + ( W2 * Returns B)
Portfolio return (50%* 22%) + (50% * 17%)
Portfolio return 19.5%
Variance (W12*Returns C2)+( W22*Returns B2)+(2*W1*W2*Returns C*Returns
B*correlation BC)
Variance (50%2*22%2)+(50%2*17%2)+(2*50%*50%*22%*17*0.6)
Variance 3.05%
Portfolio risk √Variance
Portfolio risk √3.05%
Portfolio risk 17.48%
Portfolio Expected return Risk
AB 15.4% 10.48%
AC 19.3% 17.68%
BC 19.5% 17.48%
b) Mentioning the impact of risk on the portfolio:
Investors with the help of correlation coefficient are mainly able to identify the
relevant interrelation between two stocks. The use of correlation and coefficient mainly
allows the investors to establish the link between two stocks, which could be used in reducing
the relevant risk from portfolio. Eom (2017) stated that investors by using the correlation

FUNDAMENTALS OF FINANCE
10
method are mainly able to reduce the risk from portfolio, while increasing the relevant
returns. The range of -1 to +1 is mainly identified, as the range where the correlation value
needs to fall. In addition, the value of correlation beyond and before the specified range is
considered void, where it could be assumed that the correlation estimation has gone wrong.
The investors with the help of correlation are mainly able to determine the standard deviation
of the portfolio of two stocks, which could directly indicate the risk and return generated
from the investment.
From the evaluation of the portfolio AB, BC and AC it could be identified that
relevant return from investment could be conducted. These evaluations mainly defect that are
relevant returns provided by BC and AC is relatively higher than the portfolio AB. This is
mainly due to the positive correlation between stocks BC and AC, which directly increased
the returns and risk of the portfolio. However, the portfolio AB stocks have negative
correlation, which directly reduce the risk of the portfolio substantially and decrease the
returns. Charlin and Cifuentes (2017) stated that investors mainly choose investments that
have the lowest risk, as it helps in reducing the overall risk from investment. The situation
directly states those portfolios consisting of stocks that have negative correlation are able to
cope up with the market and reduce the overall risk from investment while improving their
returns.
c) Mentioning about diversification in finance and its impact on the portfolio:
The diversification method is an essential measure that is used by investors to adjust
the weight of the stocks in the portfolio, which could help in reducing the risk and increasing
return of the investment. There are different types of measures that could be used by
individuals for diversifying the exposure in the capital market. On the contrary, Vo (2017)

FUNDAMENTALS OF FINANCE
11
argued that diversification method mainly loses its function during an economic crisis, where
due to liquidation each and every stock portrays negative returns.
The relevant diversification method was employed on portfolio AB, BC and AC,
which directly help in reducing the risk and increasing return from investment. the different
combinations of diversification of Beats mainly allowed report full used to perform better and
reduce the relevant risk from stocks in the portfolio. Mensi et al. (2017) argued that
diversification are mainly conducted with adequate research or else it could increase the risk
and generate high losses for the investor.
Question 3:
i) Mentioning about prospectus, stating when it is issued, and depicting why it is needed
to be lodged in Australia:
Legal document that is needed by an organisation before listing for security and
exchange Commission is known as prospectus. With the help of the prospectus organisations
are able to provide relevant information about the IPO and its financial condition.
Organisations mainly lodge the prospectus with ASX and ASIC (Asx.com.au 2017).
ii) Mentioning the requirements of ASX, while depicting the industry Sienna is listed:
The three listing requirements that need to be maintained by all the companies going
to enlist in ASX are depicted as follows.
1. The free float level needs to be at 20% for the company wanting to enlist in ASX.
2. The company also needs to have a minimum of 300 non affiliated shareholders @
A$2000