Final answer:
Holding a market portfolio means focusing on non-diversifiable risk, as diversifiable risk can be mitigated through diversification. Diversification is critical for economic success in investing and involves spreading investments across various assets. It can be done through various channels, including mutual funds, which inherently offer a diversified investment strategy.
Step-by-step explanation:
If you hold the market portfolio, which is a portfolio consisting of all assets in the market with weights proportional to their market values, theoretically you would not care about diversifiable risk. This is because diversifiable risk, also known as idiosyncratic or unsystematic risk, can be mitigated through the process of diversification. By holding a well-diversified portfolio, you are concerned primarily with non-diversifiable risk, also known as systematic or market risk since it affects the market as a whole and cannot be eliminated through diversification. Diversification allows investors to reduce their exposure to risks associated with a single company or industry. Buying stocks or bonds from a broad range of companies pools different types of risks and can cancel out extreme increases and decreases in value, according to the concept that 'Don’t put all your eggs in one basket.' The importance of having a diversified portfolio lies in the reduction of the impact that any single investment's poor performance may have on the overall portfolio. Hence, diversification is one of the key components to achieve economic success in investments. Places where someone can purchase stocks include stock exchanges, over-the-counter markets, or through investment platforms such as mutual funds, which inherently provide diversification. Throughout history, high levels of risk in non-diversified portfolios have often led to significant financial losses, showcasing the detrimental effects of high risk on investment portfolios.