Choose wisely. There is only one correct answer to each question.
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1.
Which number of stocks in a portfolio is the most likely to let you outperform the market?
15. There is an optimum range of stocks, and it is 12 to 20.
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.
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?
Manufacturing. Begin by looking for gaps. Here, manufacturing would be a gap. It may have some promising opportunities for you.
4.
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.
5.
An advantage of investing within your circle of competence is that it is fairly easy to find companies to invest in.
True. When you know an industry, it is usually fairly easy to evaluate potential investments in it.
6.
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.
