Choose wisely. There is only one correct answer to each question.
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1.
How many stocks do you need to own in your portfolio to derive 90% of the benefits from diversification?
12 to 18. Ninety percent of the benefits of diversification are achieved by holding 12 to 18 stocks.
2.
The more diversification in your portfolio, the better your chance of beating the market.
False. After a certain number of stocks (12 to 20), the effect wears down. However, it will reduce your overall risk.
3.
If you want to buy the stock of a certain company but you find out its product is the target of frequent lawsuits, you are looking at what kind of risk?
Unsystematic. This is the unique risk of the company that can be offset through diversification.
4.
If you decide to follow your circle of competence, your stock selections will gravitate to _______.
Either of the above. Either or perhaps both. But it is probably not wise to invest your entire portfolio that way.
5.
If you plan to add a mutual fund or two to your stock portfolio, what is a good way to start looking?
Look for gaps in your portfolio. Looking for gaps will help you identify countries and sectors that your portfolio lacks. They could be lucrative.
6.
The concept of portfolio weighting refers to _______.
The percentage of your portfolio that each stock occupies. The percentage is where the weighting comes in.
