FIN 302 Lecture Notes - Lecture 18: Marathon Petroleum, Systematic Risk, Mutual Fund

• School: U of M
• Department: Finance
• Course: FIN 302
• Professor: Denis Sosyura

Document Summary

Session 18: return, risk, and diversification - part 2. Diversification - a strategy designed to combine imperfectly correlated assets to reduce portfolio risk, but it does not eliminate the risk from a portfolio. Diversify - it"s a bad idea to hold stocks from where you are for minimizing risk - all of your eggs are going to one basket. You will be strongly affected by the local economy, but from a diversification point of view, this is an extremely bad idea. The bulk of idiosyncratic risk can be diversified by holding a portfolio of about 30 stocks from multiple industries. What mutual funds don"t want you to know. Diversification can be achieved inexpensively by purchasing index-trading stocks, also called. These funds trade like one stock, but track the performance of an entire market sector at a low cost. Diversifying acquisitions - (acquisitions of firms in other industries) are usually associated with negative stock returns.