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well diversified portfolios

U09a1 Portfolio Decisions Lotta

As an individual investor, you are attempting to invest in a well-diversified portfolio of mutual funds so that you will be somewhat insulated from any type of economic shock that may occur.

? An investment advisor recommends that you buy four different U.S. growth stock funds. Since these funds contain over 400 different U.S. stocks, the advisor says that you will be well insulated from any economic shocks. Explain why you agree or disagree with the advisor.

? A second investment advisor recommends that you invest in four different mutual funds that are focused on different countries in Europe. The advisor says that you will be completely insulated from U.S. economic conditions and that your portfolio will therefore have low risk. Explain why you agree or disagree with this strategy.

? A third investment advisor recommends that you avoid exposure to the stock markets by investing your money in four different U.S. bond funds. The advisor says that because bonds make fixed payments, these bond funds have very low risk. Explain why you agree or disagree with his recommendation.

1. For each above, recommend various types of stock, bond, and money market mutual funds for the maximum return for insulation.

2. Explain your reasons for agreeing or disagreeing with each advisor's recommendation to buy four different U.S. growth stock funds.

3. Explain your reasons for agreeing or disagreeing with advisor's recommendation to invest in four different U.S. bond funds.

Solution Summary

This question provided three different reccomendations from an investment advisor when asked to construct a well diversified portfolio. None of the proposed portofolios were well diversified. This answer provides detailed explanations as to why the investment advise was faulty.

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