Problem
Write Short notes on the following
a) Combining different stocks in a portfolio tends to reduce the risk as compared to the sum total of the risk of individual stocks. Explain with illustrations giving reasons and the condition under which this will not hold.
b) Explain with illustration the concept that increasing levels of debt in the capital of a company will increase the cost of equity but reduce the overall weighted average cost of Capital. Explain using the levered and unlevered beta method to explain this concept. Will the WACC always be less or can it go up as well.? If yes when or under what circumstances can it go up and if not why not.
c) What are the different approaches that can be considered in evolving a dividend policy for a company?