I need help on providing a feedback for this discussion post below. 1. If you we

Question

I need help on providing a feedback for this discussion post below.

1. If you were able to put together a portfolio that completely eliminated all risk, what return would you expect to earn and why?

Every investment will have some level of risk. There is combination of default risk and liquidity risk. These two risks are inherent for any kind of investment, except for investments guaranteed by the government. These can include T-Bills, ZERO coupon bonds, and municipal bonds. Risk should always compensate the investor with a return. This way, risk and return will move in the same direction. If the risk is high, required return will be high and vice-versa. So, for this case, I expect only a risk free return.

2. If someone called you and told you that he/she could guarantee you high returns on your investments with little or no risk, what would you do and why.

It is exceptionally difficult to believe this offer. Since markets are efficient, stock prices will automatically adjust with risk and return levels of stocks. It is impossible to make higher returns without risk. I would pass on the offer out of skepticism.

3. Explain how supply and demand influences the price of common stock?

Supply and demand directly affects the stock price of company. If Demand of particular stock is less and supply is constant or high, then stock prices of company decrease. Again, if demand of stock is high but supply is constant or low, then stock prices of company increase. There are various factors that affect the stock price: demand and supply of stock, market sentiments, investor confidence, political stability, and even economic stability.

Explanation / Answer

1. If you were able to put together a portfolio that completely eliminated all risk, what return would you expect to earn and why?

Every investment has some sort of risk-market risk, default risk, liquidity risk, credit risk etc. These risks are inherent for any kind of investment. Hence, it is difficult to eliminate all the risks. The closest one comes to removing all the risks is investments guaranteed by the government. These can include T-Bills, ZERO coupon bonds, and municipal bonds. As we know in each investment there is a risk-return tradeoff. Higher risk investments should offer investors highere return to compensate for the risk and lower risk investments can offer lower return to the investors because of lack of risk. If we are able to hypotheticaly remove all types of risks in a portfolio, we would expect to earn the return offered by such instruments-government securities that is risk free rate.

2. If someone called you and told you that he/she could guarantee you high returns on your investments with little or no risk, what would you do and why.

This is perfect

3. Explain how supply and demand influences the price of common stock?

Add one more line here..Supply & Demand also depends upon investor's expectations of fair value of the stock, views on the economy, industry in which the company operates, company manageement,etc.

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