Question

A portfolio manager with a growth style would probably diversify by:

A)placing a portion of the portfolio into high-yield bonds.
B)concentrating in stocks in one or two industries.
C)devoting a portion of the portfolio to securities with a negative correlation.
D)attempting to build a portfolio with a very high correlation.

Answer 1

A growth style portfolio manager would likely diversify their portfolio by including securities with a negative correlation to mitigate risk and stabilize overall performance.

Step-by-step explanation:

A portfolio manager with a growth style would probably diversify by devoting a portion of the portfolio to securities with a negative correlation. This approach mitigates risk by ensuring that not all investments will respond in the same way to market conditions. Diversification is a key principle in portfolio management, which cautions against the risk of investing too heavily in a single asset or market segment. It's based on the proverbial advice of not putting all your eggs in one basket. By including assets with a negative correlation in a portfolio, the performance of one investment may offset losses in another, leading to a more stable overall portfolio performance.

Option A (placing a portion of the portfolio into high-yield bonds) might be considered by a manager seeking income or a blend of growth and income, while option B (concentrating in stocks in one or two industries) introduces significant risk and is contrary to the concept of diversification. Option D (attempting to build a portfolio with a very high correlation) would not typically align with growth style investing as it can lead to amplified losses in adverse market conditions. Therefore, the recommended strategy for a growth-oriented portfolio manager is to diversify through investments that are not closely correlated, allowing for growth potential while managing overall portfolio risk.

Answer 2

A growth-oriented portfolio manager would likely diversify by including securities with a negative correlation to spread risk and balance returns.

Step-by-step explanation:

A portfolio manager with a growth style would probably diversify by devoting a portion of the portfolio to securities with a negative correlation. This strategy is based on the standard recommendation from financial investors that diversification is key, which means buying stocks or bonds from a wide range of companies. This approach follows the old proverb "Don't put all your eggs in one basket" and helps to cancel out extreme fluctuations in value. Diversification aims to reduce risk and enhance returns over the long term by investing in different areas that would each react differently to the same events.A portfolio manager with a growth style would likely diversify by:B) concentrating in stocks in one or two industries.The growth style of investing is characterized by seeking companies with high potential for earnings growth, often associated with innovation, expansion, and above-average profit potential. Portfolio managers adopting a growth strategy tend to focus on specific sectors or industries that are expected to experience significant expansion. By concentrating their investments in one or two industries, they aim to capture the growth potential of those sectors.

Option A, placing a portion of the portfolio into high-yield bonds, may be more aligned with an income or yield-oriented investment strategy rather than a growth-oriented approach. High-yield bonds are generally associated with income generation rather than capital appreciation.Option C, devoting a portion of the portfolio to securities with a negative correlation, is a strategy commonly associated with risk reduction rather than a growth-oriented approach. Negative correlation can provide some diversification benefits, but it is often more relevant in risk management strategies.Option D, attempting to build a portfolio with a very high correlation, would contradict the principles of diversification. Diversification typically involves spreading investments across different assets to reduce risk, and a high correlation among assets may increase vulnerability to adverse market conditions.