Finance - Assignment Business & Marketing Essay Paper

I would like you to rewrite/edit the answer in the attached Assignment in your way with the same idea of my answers (to avoid Plagiarism). Please let me know if you need any further information. Thank you

1)   Why some risk are diversifiable and some risks are non-diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? What type of risk is relevant for determining the expected return? Also explain why one of these types of risks is rewarded with a risk premium while the other type is not.

Risks attached to a security can be classified as systematic or non-systematic.

Non-systematic risks are firm/industry specific risks. They can be diversified if, the stocks that are selected have less than perfect positive correlation among themselves. Minimization occurs when the correlation coefficient between two stocks nears perfect negative correlation. Hence, though non-systematic risk of a portfolio cannot be completely eliminated, it can be minimized by careful stock selection.

On the other hand, systematic risk is not diversifiable as, it affects all stocks, though to a different degree in each case. Such a risk is not diversifiable as it arises due to change in general conditions in the economy, which, is beyond any firm and would affect all stocks.

Now the question arises as to which risk is to be taken into account for determining the expected return, granting that return should be the risk free return plus a premium for the risk undertaken.

Since non-systematic risk can be diversified and minimized, the logic is that the investor should diversity to eliminate it. As diversification is in his control he should do it and not ask for compensation if he does not diversify.

But, systematic risk is not diversifiable and hence there is reason to compensate him for the systematic risk that he undertakes.

2)      Describe the role of venture capitalists in the economy and discuss how they reduce their risk when investing in start-up businesses and explain why it can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make. 

Venture capitalists play an important role in the economy by providing risk capital to early-stage businesses which would otherwise find it difficult to raise capital. A vibrant, growing economy needs new business ideas, models and ventures which provide the necessary disruption, competition and growth. However, these early-stage businesses cannot raise capital from traditional sources such as banks and IPOs because they are early-stage with inadequate cash flows and thus too risky. VCs fill this gap by providing the necessary risk capital to these businesses.

VC's reduce their risk when investing in start-up businesses by: 

• Taking a higher stake so that they can maintain some control over the business


• Having one of the board members of the start-up company as their nominee
  
  
  
  • Having the start-up company issue compulsorily convertible preferred shares instead of equity
  
  
  
  

The decision to accept venture capital is one of the most critical decisions an entrepreneur must make because accepting venture capital also involves giving up significant control over the company. The venture capitalist is not just a financial investor but also provides strategic vision and mentorship. Thus, it is a very critical decision for an entrepreneur.