1. Briefly explain the concepts of stand-alone risk, diversifiable risk and market risk.
2. Find the weighted average Beta coefficient for a combined portfolio consisting of the two companies you are using for your final investment project.In order to do this you must find the Beta for each of your companies - use one of the online financial sites (yahoo finance, msn money, etc...).Assume that you are 60% weighted in one stock and 40% in the other.Multiply the percentage of each holding as a decimal, times that companies Beta.Add up the Betas.
Example Using Two Stocks:Total portfolio of $100,000 $40,000 PDQ - Beta - 1.5 (40,000/100,000 = .4 (40%) $60,000 OMG - Beta .8(60,000/100,000 = .6 (60%) = .4 * 1.5 = .6& .6 * .8 = .48 The combined Beta for this hypothetical portfolio would be 1.08Has diversification helped to lower your risk?(In the case of your two stocks you are not very well diversified as both companies should be in the same industry - but this same technique can be used in just about every case.)