Question

The course has preached the benefits and values of being diversified. Please discuss if an investor will be well-diversified or not by investing their entire wealth in each of the following stocks:

1. “spy”
2. “Brk.b”
3. “qqq”

Answer 1

a]

An investor will be well-diversified by investing their entire wealth in SPY because the the SPY is an ETF that invests in the S&P 500 stocks. As the S&P 500 is a broad-based index consisting of 500 stocks respresenting all the major sectors of the economy, the investor will be well diversified. The S&P is nothing but the market portfolio itself.

b]

An investor will not be well-diversified by investing their entire wealth in BRK.B because Berkshire Hathaway is a single company. Although BRK.B is an investment company investing in various other companies, investing all the investor's wealtin in BRK.B does not provide diversification because all the wealth is invested in one company. The investor will face a high level of firm-specific risk, and there is no diversification across sectors and companies.

c]

An investor will not be well-diversified by investing their entire wealth in QQQ because QQQ is an ETF that tracks the NASDAQ 100 but invests only in non-financial stocks. It has a large weightage in tech stocks. Therefore, it provides some diversifcation, but not adequate to be called a "well-diversified" portfolio because of its large exposure to a single sector (tech).