Corporate Finance : Stock Portfolio and Diversification

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You are considering assembling a portfolio of stocks worth approximately £100,000 for a client. It was decided to invest into selected stocks covered by the FTSE250. The aim is to have a well-diversified but cost-effective portfolio. The relatively large costs of purchasing small amounts of stocks would make holding the entire FTSE250 prohibitively expensive.

Using an essay format:
(a) Discuss the benefits of diversification and explain, with reference
to the information provided in the case above, why it might be
best to only invest into a selection of stocks from the FTSE250.
Describe how you might determine those stocks you invest in. (65 marks)
(b) Discuss the advantages and disadvantages of using an index as
the ‘market’ in assessing portfolios. (35 marks)
(Total – 100 marks)

Please proof the above with financial data, and statistical calculations. Especially with the stocks that you are going to choose.


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