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Stocks 501: Constructing a Portfolio

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1.
Unsystematic risk can be diversified away by _______.
Choose wisely. There is only one correct answer.
Holding a larger number of stocks. Unsystematic risk is the risk involved in holding individual companies. It can be diversified away by holding a larger number of stocks.
2.
What is a good rule of thumb for deciding how to weight the stock holdings in your portfolio?
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Use your confidence in each of the stocks as a guide. Be certain that the highest-weighted stocks are the ones you feel the most confident about.
3.
You can increase your odds of beating the stock market index performance by _______.
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Holding fewer than 20 stocks in your portfolio. If you hold a diversified portfolio, on average you should expect to achieve a market rate of return. By holding a concentrated portfolio you increase your chances of obtaining a better return than the market, but at the same time, you also increase your risk of obtaining a lower rate of return than the market.
4.
Imagine you have plenty of stocks in the software sector, the energy sector, and the agriculture sector, but you want to add some mutual funds to your portfolio to gain some breadth. Which of the following sectors would make the most sense to look into?
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Manufacturing. Begin by looking for gaps. Here, manufacturing would be a gap. It may have some promising opportunities for you.
5.
What's the largest potential problem with owning too few stocks?
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You run the risk that one bad stock pick could produce an extremely large loss. If you hold too few stocks, you run the risk that one bad stock pick could produce an extremely large loss. For example, if you owned three stocks, each worth one third of your portfolio, and one of your stocks went to zero, your portfolio would lose one third of its value. Swinging only at fat pitches is good, not bad.
6.
If your circle of competence in investing is within the software industry, then it is a good idea to have all the stocks you own be in the software industry.
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False. Having your portfolio fully weighted in one industry can expose it to a lot of risk.