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FIN 302 (21)
Lecture 18

FIN 302 Lecture 18: Session 18

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FIN 302
Denis Sosyura

SESSION 18: RETURN, RISK, AND DIVERSIFICATION - PART 2 - Practical insights for investing - Constructing well-diversified portfolios at minimum costs - Mini-case: Diversification Mistake at Chesapeake Energy REVIEW Diversification - a strategy designed to combine imperfectly correlated assets to reduce portfolio risk, but it does not eliminate the risk from a portfolio - Diversify - it’s a bad idea to hold stocks from where you are for minimizing risk - All of your eggs are going to one basket - You will be strongly affected by the local economy, but from a diversification point of view, this is an extremely bad idea HOW MANY STOCKS MAKE A WELL-DIVERSIFIED PORTFOLIO? - The bulk of idiosyncratic risk can be diversified by holding a portfolio of about 30 stocks from multiple industries WHAT MUTUAL FUNDS DON’T WANT YOU TO KNOW - Diversification can be achieved inexpensively by purchasing index-trading stocks, also called ETFs (exchange-traded funds) - These funds trade like one stock, but track the performance of an entire market sector at a low cost MARKET EVIDENCE: DIVERSIFICATION IN CORPORATE STRATEGY Diversifying acquisitions - (acquisitions of firms in other industries) are usually associated with negative stock returns - The majority of diversified conglomerates have valuations that are 10-12% lower than a combination of comparable single-segment firms - The number of conglomerates in 1991-2016 has declined dramatically compared to 1970-1990 - Bot
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