After combing through the data, you have noticed that firms hiring Fishergraduates earn average abnormal returns of 3% per year over the next few years. You are convinced that this is a genuine profit opportunity and so have decided to trade on it. You have $10,000 to invest and two options: (1) invest all $10,000 in one company that has just hired a Fisher graduate; (2) invest $1,000 in each of ten companies that have just hired Fisher graduates. Which choice is preferable, or does it not matter?

Question

Business

Anvil

18 July, 05:11

After combing through the data, you have noticed that firms hiring Fishergraduates earn average abnormal returns of 3% per year over the next few years. You are convinced that this is a genuine profit opportunity and so have decided to trade on it. You have $10,000 to invest and two options: (1) invest all $10,000 in one company that has just hired a Fisher graduate; (2) invest $1,000 in each of ten companies that have just hired Fisher graduates. Which choice is preferable, or does it not matter?

+4

Answers (1)

Know the Answer?

Elyse Brennan · Answer 1

option (2)

Explanation:

That's right, but what if all $ 10,000 was invested in a company and it didn't come out much? The probability of earning an extraordinary income increases. It is also dangerous. This is because there is a 50% probability that the company will perform better. Therefore it is advisable to invest 1,000 companies in ten companies. Thereby reducing the risk. Well, diversification not only reduces risk but also increases the chances of profit.