Warren Buffet is of the opinion that for certain investment professionals (like himself) it may not...

Warren Buffet is of the opinion that for certain investment professionals (like himself) it may not be best to hold a well-diversified portfolio. Why not?

Expert Solution

Well diversified portfolio will be eliminating the unsystematic risk out of the portfolio but it will also eliminate the return to a large extent because well diversified portfolio can only outperform the market to a very thin extent and it cannot significantly outperform the market for a larger extent so it can be said that higher degree of diversification will always be leading to diminishing the overall rate of return earned and hence it would be better to lower degree of diversification if investors want to beat the rate of return of market to a higher extent for a longer period.

Diversification will be cutting upon the risk associated with the company specific in nature and diversification is often preferred by highly risk-averse investors whereas low level of diversification can also provide with better degree of protection and it will still be helpful in making a high rate of return so these investors are prefering a very low degree of diversification and they are trying to invest on the company's fundamental for the longer period.

jeff jeffy answered 2 years ago

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