Answered: Why is it important for an investor to…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 6LO

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Why is it important for an investor to create a well-diversified investment portfolio? How should an investor allocate investment funds across sectors and industries?

Expert Solution

Step 1

It is suggested to investors not to put all eggs in single bucket so to avoid risk of losing all of them together. Therefore, diversification is the technique which is used by the investors to reduce the risk associated with their investments.

Step 2

Diversification of investment portfolio is important for investors as they can use this technique for risk minimization while allocating their investments. The purpose of portfolio diversification is to maximize returns by investing in different financial instruments along with risk reduction.

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