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Explain why the first statement is correctly understood

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Reference no: EM132507623

Suppose that a capital-markets investment fund wants to lower the amount of risk they are exposed to. They call a meeting to discuss whether they hold a suitable balance between equity and bond investments. One person thinks they should decrease their bond investments, mentioning that "a high debt-to-equity ratio is very risky". Someone else disagrees, suggesting that they decrease their equity investments because "bond investments provide fixed cash flows and are therefore free of risk".

Explain why the first statement is correctly understood and applied but is mistaken in this context. Then explain why the second person's opinion is valid, even though their statement is not quite correct (making sure to explain why it is not correct).

Reference no: EM132507623

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