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1. 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-Clarks distribution policy impacting the company and is it increasing or decreasing its EPS and dividends-per-share? Would knowing Kimberly-Clarke's beta help you to answer this question?

2. Explain why a diversified portfolio can eliminate some, but not all, of the risk of the individual securities.

3. Assume that you have inherited a portfolio in which 60% of the market value consists of shares in a mutual fund that invests in a well diversified selection of large company stocks and 40% of the value consists of shares of Kimberly-Clark common stock. Consider three alternatives:

a) Keep the portfolio as it is.

b) Sell a large part or all of the KMB shares, and re-invest the proceeds in the large-company mutual fund.

c) Sell a large part or all of the KMB shares, and re-invest the proceeds in a mutual fund that invests in a well diversified selection of small company stocks.

Assume that you intend to hold this portfolio for 20 years. Rank these three alternatives in order of your expected total return on investment over your holding period, from lowest to highest. Now rank them again according to the level of risk you expect to experience during your holding period, from lowest to highest. Explain the reasons for your rankings, based on documented portfolio theories and capital market history as noted in the textbook (Ross, et al., 2019). Be specific about any assumptions you may make. Would any of these three alternatives be an inefficient investment choice, as compared to the other two? Explain why or why not.

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