1-) (folake budale)
Consider the following two, completely separate economies. The expected return and volatility of all stocks in both economies are the same.
In the first economy, all stocks move together in good times all prices rise together and in bad times, they all fall together.
In the second economy, stock returns are independent-one stock increasing in price has no effect on the prices of other stocks.
Which economy would you choose to invest in?
Explain your rationale for your choice.
I would invest in the economy in which stock returns are independent owing to the fact that risk can be diversified away in a large portfolio. If returns each year are independent, the volatility of the average annual return does decline with the number of years that we invest. Diversification can help an investor manage risk and reduce the volatility of an asset’s price movements (Berk et al., 2021). Remember, however, that no matter how diversified a portfolio is, risk can never be eliminated completely. When you diversify your investments, you reduce the amount of risk you’re exposed to in order to maximize your returns. Although, there are certain risks you can’t avoid, such as systematic risks, you can hedge against unsystematic risks like business or financial risks (Lioudis, 2021).
As explained by Berk et al. (2021), we can reduce systematic risk of a portfolio by selling stocks and investing in risk-free bonds, but at the cost of giving up the higher expected return of stocks. Thus, a large portfolio eliminates all unsystematic risk, leaving no additional risk. Since that portfolio has no risk, it cannot earn a risk premium, and instead must earn the risk-free interest rate. This goes with the general principle that “the risk premium for diversifiable risk is zero. Thus, investors are not compensated for holding unsystematic risk (Berk et al., 2021).
References
Berk, J., DeMarzo, P., & Hartford, J. (2021). Fundamentals of Corporate Finance. Pearson Publishers, 5th Edition. New York.
Lioudis, N. (2021). The importance of Diversification. Investopedia. Retrieved March 14, 2022, from https://www.investopedia.com/investing/importance
2- (aarthi sodagam)
Amy Edmondson puts forward a very effective presentation on teaming. She describes teaming in her words as – Teaming is about identifying essential collaborators and quickly getting up to speed on what they know so you can work together to get things done. Among the many parameters we can work through teaming, the primary ones are: expertise, distance and time-zones. In the ever growing 24/7 global fast-paced operations around the world each day, it is evidently getting more demanding to work together (can be best explained in a hospital environment).
In the Chile incident in 2010, the attributes of teaming identified and the roles played by each person involved are –
- Specific, shared purpose and vision: Utmost consideration, trust and coordination was seen from each individual involved in the case.
- Mutual, internal accountability: Every individual trapped inside was working for themselves and for the sake of saving their team, and not because they were being pressured.
- Blurring of formal distinctions: All 33 men trapped inside had different ranks, including those working to bring them out, from the engineers devising a plan to NASA helping them and the President who had a responsibility toward these men and their families. Despite how high they ranked, they all came down to the same level to work toward achieving one single goal.
- Creative continuous improvement: The rescue mission is a coordinatied brainstorming session of 55 days on the whole ultimately leading to success.
- High credibility and trust: The men trapped inside trusted their authorities outside that they’ll do their best to bring them out, and the authorities outside trusted these men to take good care of each other till a solid plan was devised.
The critical skills identified in this situation are –
Situational Humility: Everyone was clear on one aspect – that nobody has the answer to the problem they’re stuck in.
This led to Curiousity to find out what’s in store and how it can help them. This in turn led to psychological safety and understanding that the basic human challenge is that “It’s hard to learn if you think you already know.” When we stop seeing other people around us as our competitors, we can never find out what they have in mind and more often than not, it is what would save us from whatever situation we are stuck in.
References:
CNN. (2022). The Chilean Mine Rescue Fast Facts.Retrieved from https://www.cnn.com/2013/07/13/world/americas/chilean-mine-rescue/index.html
Edmondson, A. (2017). How to turn a group of strangers into a team. Retrieved from https://www.ted.com/talks/amy_edmondson_how_to_turn_a_group_of_strangers_into_a_team/transcript?language=en
Whetten, D. A., & Cameron, K. S. (2016). Developing Management Skills. 9th Edition. New York: Pearson.
