Financial Management Question 1 Company Term Paper

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Question

Diversification is a technique that reduces risks in an investment portfolio. By spreading out the types of investments in your portfolio, you protect yourself from the losses incurred by any one investment suddenly tanking. Diversification can be done in a several different ways. One common way is to vary investment vehicles; stocks, bonds, and cash. Another way is to take on stocks of different risk levels. You might hold a mix of large cap, small cap, and growth fund investments. Again, a crash in one area will be offset by stability or even gains in another. Another diversification strategy is holding companies of different industries or geographies. You might hold companies from steel, agribusiness or toys. You alternatively might hold companies from, China, India, and Canada. This is why diversification is called "a free lunch"; you are always protected from loss without automatically reducing returns on your investments.

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Question

The Price-Earnings ratio compares the price of a company's stock to its earnings per share. In short, it uses a company's earnings to value its stock. It is based on the belief that the price of stock should be a reflection of a company's profit. Calculations for profit use net profits from some designated period of time.

The PE is sensitive to the number of shares offered by a company. It is also sensitive to changes in earnings per share. If earnings per share rises while the stock price remains the same, the EP drops. If the number of shares rises while the stock price stays the same the EP drops again. This second condition would certainly be a losing situation from an investors' point-of-view. Low PE stocks are not necessarily cheap. Depending on the company and industry, low PE may indicate a….....

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