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.
Unsystematic risk can be diversified away by _______.
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.
3.
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.
False. Having your portfolio fully weighted in one industry can expose it to a lot of risk.
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?
Manufacturing. Begin by looking for gaps. Here, manufacturing would be a gap. It may have some promising opportunities for you.
5.
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.
6.
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.
