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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 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

According to portfolio theory, people should hold more than one asset (or investment) in their portfolios.

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The claim is very true and applied to people like Warren Buffett, the greatest stock market investor, who has specifically said:

"Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."

Warren buffett's reason for success was not diversification and safe investment but identification of sick companies and turnaround ...

Solution provided by:
Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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