Final answer:
To minimize macro risk in a stock portfolio, investing in stocks with low exposure to business cycles and employing diversification strategies, like indexed mutual funds or a broad range of companies, can mitigate extreme performance fluctuations. The correct answer is have low exposure to business cycles.
Step-by-step explanation:
A good way to reduce macro risk in a stock portfolio is to invest in stocks that have low exposure to business cycles. One effective method of achieving this is through diversification, which involves spreading investments across a variety of stocks from different sectors or geographic locations. This approach can help offset risks associated with any single stock or sector.
Specifically, investing in an indexed mutual fund, such as one designed to mimic the Standard & Poor's 500, can be a strategic move. However, it's important to understand that even with diversification, investors should be prepared for market fluctuations, as experienced during events like the 2008 financial crisis, which saw many stock funds, including diversified ones, significantly decline in value.
Investing in individual companies carries inherent risks due to various factors such as supply and demand or managerial decisions. Thus, apart from diversification, choosing companies that are less affected by economic downturns can also help in reducing macro risk.
The adage 'Don't put all your eggs in one basket' captures the essence of diversification in managing investment risks. By investing in a broad range of companies, the likelihood of extreme losses (or gains) affecting the portfolio's overall performance diminishes.