Reference no: EM132818700

1. Diversification is a very important tool in risk management. There is a golden rule related to any investment: The higher risk - the higher returns. So, there is always a trade-off between risk and return. Diversification helps to reduce risk by creating a portfolio that includes assets that are negatively correlated. It means that if one asset value goes down, another asset value that is negatively correlated to the first one goes up. Using this, a person may reduce unsystematic risk (company-specific) to the minimum level, but still, the portfolio bears a systematic risk that affects the entire market.

2. Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event. It can be spreading your risk across different types of investments, the goal being to increase your odds of investment success. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Here, we look at why this is true and how to accomplish diversification. Diversification is important in investing because markets can be volatile and unpredictable. By diversifying your portfolio, you "reduce the consequences of a wrong forecast,".

Diversification is important in investing because markets can be volatile and unpredictable. By diversifying your portfolio, you "reduce the consequences of a wrong forecast,". The benefit of diversification in your investments is to minimize the risk of a bad event taking out your entire portfolio. When you keep a high percentage of your portfolio in a single type of investment, you risk losing it if that investment sours. The benefits of diversification include:

Minimizes the risk of loss to your overall portfolio.

Exposes you to more opportunities for return.

Safeguards you against adverse market cycles.

Reduces volatility.

3. The taxation of gain from the sale of real estate is taxable as ordinary income. Real estate investment is a long-term investment and the value of assets will appreciate overtime that increases in demand will lead to an increase in the value of rent and property. As the supply cannot be increased, the value of the property will therefore increase with the passage of time and gain from investors from the sale of real state. We can then determine that the game on sale in a real state is taxed just like ordinary income.

4. Gain from a sale of a property is taxed as an ordinary income if the property is held for less than one year. If the property is held for more than one year it is taxed at a different rate. The first step is to determine price appreciation that equals Sale price minus acquisition price. Then, we compute the tax on price appreciation that is calculated using a 15% tax rate. Next, we should calculate the accumulated depreciation that took place during the holding period and compute tax on accumulated depreciation using particular rent. Finally, we should add tax on price appreciation and tax on accumulated depreciation together to get total capital gain tax.