Consider the effects of diversification, how should Sarah respond to t
QUESTION
Consider the effects of diversification, how should Sarah respond to the suggestion that you invest 100% of your 401(k) account in East Coast Yachts stock?
Diversification is critical to investors as it prevents bunching risk. Considering own just one stock in your 401(k). It could go up or could down, it could even go into bankruptcy. That is a very risky bet. However if you diversify into two companies you risk is reduced. One company might do well while the other does not. However, the loss from the second stock would be offset by the gain in the first. Now imagine a portfolio of 20 stocks. Some stocks¦
er better returns when the market is strong and others offer better returns when the market isnt doing well. This is diversification at work. Diversification in owning multiple stocks offers better returns on a risk adjusted basis than just owning the one East Coast Yachts in your 401(k). Hope this helps!
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