In your initial response for this week, explain why a diversified portfolio can eliminate some, but not all, of the risk of the individual securities. Describe how the variance terms are effectively diversified away in a large portfolio, but the covariance terms are not. Given your assessment on the mechanics of a diversified portfolio, how would a portfolio with a large percentage (i.e., 25 – 40%) of Kimberly-Clark shares, need to be protected or adjusted in terms of accounting for portfolio risk? Or would it? Base your answers on your assumptions and documented portfolio theories, as noted in the textbook (Ross, et al., 2016). Additionally, would shares of Kimberly-Clark within a portfolio be considered a defensive stock? To answer this question, consider whether the company generates a significant amount of cash flow, and how much of it is used for dividends and share repurchases. How is Kimberly-Clark’s distribution policy impacting the company and is it increasing or decreasing its EPS and dividends-per-share?
Ross, Stephen A., Randolph Westerfield, and Jeffrey F. Jaffe. Corporate Finance. 12th ed. New York: McGraw-Hill, 2016. Print.