Risk Management and Initial Public Offering Questions - Assignment Example

A combination of the two stocks will reduce total potential returns (since stock B is underperforming), but also reduce portfolio viability as compared to market changes. Whereas the two stocks are influenced by the market (which is the very definition of systematic risk), they change in opposite directions, which will reduce total portfolio risk. No, portfolio diversification to betas cannot entirely remove potential market risks. While unsystematic risks are eliminated in a larger portfolio, market risks still that affect most of the assets/stocks in a portfolio are not.

Even entirely diversified portfolio stocks are vulnerable to market changes. Furthermore, beta coefficients are more reliable for short-term risk-assessment and can be misleading in the long-run. This is so, because beta coefficients mostly reflect past price movements, and are not reliable indicators for assets/stocks with no or recent price history (McClure, B., 2004) IPO or the Initial Price Offering is the process of bringing private companies to the public market for the first time. The IPO represents a significant stage in the growth of a company because it provides access to public capital markets and increases company credibility and exposure.

Companies usually decide to go public because they need access to additional capital to implement long-term business strategies or use funds for acquisitions. Furthermore, this is capital that does not have to be repaid and does not involve interest payments. IPO also gives opportunities for new future stock offerings. Companies go public also to get media attention. Nowadays IPOs are used as marketing instruments to increase public awareness and enhance brand name recognition. In other cases, companies may go public to change management style and settle managerial problems using the challenging approach of capital restructuring.