Choose wisely. There is only one correct answer to each question.
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1.
What is a good rule of thumb for deciding how to weight the stock holdings in your portfolio?
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.
2.
If an economic event affects every single stock in the country, it is likely an example of _______ risk.
Systematic. Systematic risk is the type that affects all stocks, not those of a particular company. It cannot normally be diversified away.
3.
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.
4.
What's the largest potential problem with owning too few stocks?
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.
5.
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.
6.
Instead of asking whether stocks or mutual funds would be better to have in your portfolio, a more strategic question might be, _______.
How can my portfolio benefit the most from each of these investments? Though you may ultimately decide to stick with either, you should ask the question anyway. You may be surprised at the answer.
