Question

Which of the following portfolios is best diversified?
​a.​Apple, Microsoft, Alphabet, Intel, Cisco, IBM
​b.​1,000 shares of an index fund that tracks the entire S&P 500
​c.​Disney, Apple, Nike, Bank of America, and miscellaneous bond holdings
​d.​Portfolios B and C are both well diversified
​e.​All of the above portfolios are well diversified

Answer 1

Option a is not a well diversified portfolio because .​Apple, Microsoft, Alphabet, Intel, Cisco, IBM all are technology based industry with similar line of business. Hence risk is not diversified away.

Option b is a well diversified portfolio because index fund consists of many stocks with negative correlation and it atleast helps to diversify unsystematic or industry based risk.

Option c . is a well diversified portfolio because it consists of bond and stocks from different industries.

Option d. B and C are both well diversified. is correct option