Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
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.
3.
Portfolio weighting is all about what percentage of your portfolio each stock occupies.
True. As such, it adds a new dimension to your portfolio and can potentially enhance returns.
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.
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.
6.
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.
