Asked by Megan Smith on Jun 30, 2024
Verified
During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?
A) The portfolios were not adequately diversified because the assets were negatively correlated, so all of the assets had negative returns at the same time.
B) The portfolios were not adequately diversified because the assets were more positively correlated than expected, so all of the assets had negative returns at the same time.
C) The portfolios were adequately diversified, but the assets should have been more positively correlated to protect against recession risk.
D) The investors should not have diversified their investments to protect against recession risk.
Diversified Portfolios
Investment strategies involving a mix of assets (stocks, bonds, real estate, etc.) to reduce risk through diversification.
Positive Correlation
A relationship between two variables where they move in the same direction; as one increases, the other also increases.
Recession Risk
The likelihood of an economic downturn, characterized by a significant decline in economic activity across the economy lasting more than a few months.
- Apprehend the value and limitations of diversification in the management of investment risk.
Verified Answer
Learning Objectives
- Apprehend the value and limitations of diversification in the management of investment risk.
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