Question

f you had $50,000 to invest in the stock market, how would you go about reducing your risk exposure?

Answer 1

You can reduce your risk exposure by investing in a diversified portfolio of stocks. In general, unsystematic risk, that is the risk associated with individual companies can be minimized by investing in stocks that are highly uncorrelated with each other. While you cannot eliminate the market risk (also called systematic risk), you can certainly minimize unsystematic risk by investing in about 20 to 30 stocks from different sectors.

Another way to achieve diversification is by investing in the market index such as the S&P 500, which is a market capitalization weighted index of the 500 largest companies in the U.S.

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