Portfolio Investments and Diversification
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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. Briefly address 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
In terms of portfolio investments, this solution discusses who, or what group(s), if any at all, might not want to spread his/her risks and diversify, and why (or why not).
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RESPONSE:
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.
Briefly address each of the following:
1. Is such a claim true or false? Explain.
This question is somewhat controversial, and although most companies choose to diversify (at least having more than only one asset or investment), there are those that choose not to. In other words, there is always an exception to the rule. Some smaller companies, for example, may not want to take any risks because of their limited assets; diversification may mean spreading their assets too thin, as "you can't be everything to everyone" so to speak. It is better to focus on your ...
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