Question

1) What does it mean to "Diversify" your portfolio?

A. To hold more than 1 stock

B. For your stocks to not be all in the same area of the economy

C. To have a mix between stocks, mutual funds, or other securities

D. A and B

2) What is Capital Preservation?

A. To make sure you don't lose your initial investment

B. To make sure you keep the gains you make investing

C. When companies buy back stock

D. It is when you use Stop orders

3 ) Why would you want to diversify between sectors?

A. To make sure you get the maximum profit when one sector goes up

B. In case a sector-wide event causes all stocks to drop

C. Because every diversified portfolio has at least one energy stock and one technology stock

D. Because every portfolio should have ETFs

4) What is a good way to stay diversified?

A. Invest only in ETFs

B. Invest only in Mutual Funds

C. Re-balance your portfolio every 3 months

D. These are all good ways to stay diversified

5) What is a danger of over-diversification?

A. It is impossible to keep track of more than 10 stocks

B. If your investments are spread thin, it is hard to beat the market

C. Your portfolio has more risk than if you were less diversified

D. None of these are serious dangers

Answer 1

Diversification of portfolio means to have a mix of stock,mutual funds or other securities. The investors then diversify among investments within the assets classes, such as By selecting stocks from various sectors that tend to have low Return correlation.

Capital preservation means to make sure you don't lose your initial investment. It is a strategy for protecting the money you have Available to invest by choosing insured accounts Or fixed income investment that promise return of principal.

Diversification between sectors is done to reduce risk and achieve maximum profit. In case stock of one sector will go down the other sector on other side might go up and thus reduce risk and generate return for the investor.

Diversification will be best achieved if we go for rebalancing every 3 months . As investing only in ETFs or mutual funds doesn't guarantee return.

Danger of overdiversification is that Chasing that diversification can stretch your portfolio too thin, make you loose focus On how your money is invested,require too much time and energy and too expensive to maintain.It becomes hard to beat the market. each time we add a new investment to the portfolio, it lowrel the risk but by A smaller and smaller amount.