Question

An article in the Wall Street Journal observed that "investment pros" recommend that "individual investors spread their bets, pointing out those who bet the house on hot performers often end up losing."

Source: Jonnelle Marte, "Diversification Loses Some Fans as Planners Tighten Their Focus," Wall Street

Journal ,

February 21, 2012.

What does it mean to "bet the house on hot performers"?

A.It means that an investor will use a small portion of their portfolio to take a small risk that could reap large rewards.

B.It means that an investor purchases a variety of assets with different rates of return and risks.

C.It means that an investor takes all or most of their portfolio and purchases just one or two assets they believe will increase in value.

D.It means that an investor places their house as collateral to borrow additional funds to buy more of an asset they believe will increase in valure.

For an investor an alternative strategy that would be better for small investors,

A.might be to keep all of their wealth in cash so they can spend it whenever they desire.

B.might be to purchase a variety of different assets with different rates or return and risks for a diversified portfolio.

C.might be to find one or two stocks with a high potential return and place all of one's portfolio into those assets.

D.might be to only buy government bonds that have a very low risk associated with them.

Answer 1

For first part, "bet the house on hot performers" means placing the money on the best current stocks that have performed quite well in past and they believe will outperform others in future too. So, option (C) is the correct choice for the explanation.

For the second part, a better strategy always is to have a well diversified portfolio as possible so that the risk is distributed evenly over assets of different categories and thereby minimizing the downside risk as much as possible. So, option(B) is correct.