Question

Steven is a senior in high school. His father, Jeff, is a successful businessman. The two are very close and talk openly about things, including money and investments. Jeff decides to change his investments, and he puts one-fourth of his money in a steadily growing company, one-fourth in a rapidly growing company, one-fourth in a single company that has paid good dividends, and one-fourth in a company based overseas. When he tells Steven, he is shocked that Steven is worried. Is Steven right to be worried? Why or why not?

Answer 1

No, Stephen should not be worried.

Step-by-step explanation:

What Jeff has done is known as diversification.

Diversification is an investment strategy of spreading one's capital in different categories of assets. Practicing diversification means investing in many classes of assets as opposed to focusing on one particular asset.

By diversifying, Steven's father is safeguarding against heavy losses should the market behave against expectation. If one has focused on only one class of assets, if the market moves against forecast, he will suffer heavy losses. If he has diversified, some classes of assets will make profits and other losses. Diversification is, therefore, a risk mitigation tool that guards against total capital loss. Steven should be happy instead of getting worried.