You are discussing your 40l(k) with Dan Ervin when he mentions that Sarah Brown,

Question

You are discussing your 40l(k) with Dan Ervin when he mentions that Sarah Brown, a representative from Bledsoe Financial Services. is visiting East Coast Yachts today. You decide that you should meet with Sarah, so Dan sets up an appointment for you later in the day. When you sit down with Sarah. she discusses the various investment options available in the company's 401 (k) account. You mention to Sarah that you researched East Coast Yachts before you accepted your new job. You are confident in management's ability to lead the company. Analysis of the company has led to your belief that the company is growing and will achieve a greater market share in the future. You also feel you should support your employer. Given these considerations, along with the fact that you are a conservative investor, you are leaning toward investing 100 percent of your 401(k) account in East Coast Yachts. Assume the risk-free rate is 3.2 percent. The correlation between the Bledsoe bond fund and large-cap stock fund is .15. Note that the spreadsheet graphing and "solver'' functions may assist you in answering the following questions.

I. Considering the effects of diversification, how should Sarah respond to the suggestion that you invest 100 percent of your 401(k) account in East Coast Yachts stock?

Explanation / Answer

I. Considering the effects of diversification, how should Sarah respond to the suggestion that you invest 100 percent of your 401(k) account in East Coast Yachts stock?

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories, It maximizes the returns and minimizes the risk.Its better to have diversified the portfolio instead of investing the whole amount in one company stock. If some time company doesn't perform well ,will impact the stock value,in that case the investor will suffer a huge loss. Thats why it is always suggested by the financial adviser to have a diversified portfolio,if some companies are performing well and some companies are not performing ,but the net impact would be the investor would earn some good returns with minimum risk of losing money.

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