Question

You are advising a client on which stocks to include in their portfolio. The client currently has an equally weighted portfolio consisting of stock in Delta airlines, Southwest airlines, Amazon inc, and Apple computers. They are considering buying stock in one of the following firms, American Airlines, Microsoft inc, and Coca-Cola.

Is it usually a good idea for this client to hold only 4 or 5 stocks? Explain why.

Answer 1

I will be advising him to add Coca-Cola as another stock to the overall portfolio because it will be providing him with diversification of the portfolio as he is already holding such stocks like airlines industries and technology industries stock but he does not have a food and beverage industry stock so I should be diversifying into Coca-Cola as it will be offering him with minimization of unsystematic risk.

Yes, it is a good idea for client to hold limited number of stock with appropriate diversification because it will be helping him to manage his stocks and it will also help him to control the the risk of this portfolio because he will be having exposure to a handful of stalks and he will only have to track those stocks so a client should be having 4 to 5 stocks and he should be having appropriate diversification into various sectors.