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Dudley Trudy, CFA, recently met with one of his clients. Trudy typically invests in a master list of 30 equities drawn from several industries. As the meeting concluded, the client made the following statement: “I trust your stock-picking ability and believe that you should invest my funds in your five best ideas. Why invest in 30 companies when you obviously have stronger opinions on a few of them?” Trudy plans to respond to his client within the context of Modern Portfolio Theory.

1. Contrast the concepts of systematic risk and firm-specific risk, and give an example of each type of risk;

2. Analyze critically the client’s suggestion. Discuss how both systematic and firm-specific risk change as the number of securities in a portfolio increases.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92264988

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