question archive Celestila Moonn, an UMB MBA student reads the following excerpt in The Wall Street Journal and after that Moonn was wondering whether her 401K portfolio (which holds stocks, bonds and mutual funds) would benefit from diversification
Celestila Moonn, an UMB MBA student reads the following excerpt in The Wall Street Journal and after that Moonn was wondering whether her 401K portfolio (which holds stocks, bonds and mutual funds) would benefit from diversification
Subject:EconomicsPrice:3.87 Bought7
Celestila Moonn, an UMB MBA student reads the following excerpt in The Wall Street Journal and after that Moonn was wondering whether her 401K portfolio (which holds stocks, bonds and mutual funds) would benefit from diversification.
Diversification has been a fundamental concept in asset management and asset-pricing theories. The concept is so essential that it has been popularized by the adage: "Don't put all your eggs in one basket." In finance, diversification implies that you can obtain the same expected returns but reduce your risk by investing in a portfolio of many assets rather than investing in only one or a few assets. .........What has been questioned is the applicability of diversification. In fact, in the 2007-09 financial crisis, portfolios that were supposed to be well diversified and, therefore, protected from the risk of large losses actually lost significant value. For example, those invested in the S&P 500, which is, in itself, highly diversified (but consisting entirely of equities), would have lost 57% from the market's peak (9 October 2007) to its bottom (9 March 2009).
Briefly discuss whether you agree or disagree with Moonn'sconcerns.
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
I'm disagree with her concern of diversification applicability because diversification is just investing in multiple options like in fixed deposits, stocks, equities etc. for reducing risk.
Step-by-step explanation
As in the question she clarify her statement by giving an instance of 2007-2009 financial crisis but that was a global financial crisis which started from sub prime mortgage market. Also risk is depending on the portfolio you choose whether you choose less risky and low return portfolio or high risk and high return portfolio. And as we know for choosing less risky portfolio need to invest more in fixed bonds and let more cash in hand.
