Portfolio Theory
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According to portfolio theory, people should hold more than one asset (or investment) in their portfolios. The idea is that if some investments do poorly, other investments in the portfolio can compensate for the poor investments. Some experts claim, however, that not all people in a society follow this prescription. In other words, not everyone will diversify and, in fact, many hold only one single asset or investment. For this assignment you are to briefly addresss each of the following:
Is such a claim true or false? Explain.
Who, or what group(s), if any at all, might not want to spread his/her risks and diversify? Why or why not?
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Solution Summary
This discusses the diversification and Portfolio Theory
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It is true that risks can be be reduced by Portfolio diversification . An important way to reduce the risk of investing is to diversify your investments. Diversification is akin to "not putting all your eggs in one basket." For example, if your portfolio only consisted of stocks of technology companies, it would likely face a substantial loss in value if a major event adversely affected the technology industry.
There are different ways to diversify a portfolio whose holdings are concentrated in one industry. You might invest in the stocks of companies belonging to other industry groups. You might allocate to different categories of stocks, such as growth, value, or income stocks.
But there can be situation where some person may not want to diversify. It is possible when they are satisfied by their investment in the ...
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