Question

A customer holds a large portfolio of corporate bonds. the customer is worried about capital risk. which diversification strategy would be least effective to minimize capital risk for this customer?

Answer 1

Diversification between several denominations.

Diversification:

• Diversifying among various issuers, states, and industries would be effective strategies of reducing the unsystematic risk of a portfolio. As a result, only a tiny fraction of the portfolio would be impacted if one issuer, industry, or economic region experiences difficulty. Diversification among securities with various levels of maturity also offers a measure of risk management. When compared to longer maturities, the price of short term (less than one year) maturities will only slightly decrease if market interest rates increase. Consequently, a variety of maturities reduces capital risk. Diversification is not impacted by bond denominations.
• By distributing assets among different financial instruments, industries, and other categories, diversification is an approach for lowering risk. It tries to optimize return by investing in various sectors that ought to respond to changes in market conditions differently.

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