Celestila Moonn, an UMB MBA student reads the following excerpt in The Wall Street Journal and after that Moonn was wondering whether her 401K

Celestila Moonn, an UMB MBA student reads the following excerpt in The Wall Street Journal and after that Moonn was wondering whether her 401K portfolio (which holds stocks, bonds and mutual funds) would benefit from diversification.

Diversification has been a fundamental concept in asset management and asset-pricing theories. The concept is so essential that it has been popularized by the adage: “Don’t put all your eggs in one basket.” In finance, diversification implies that you can obtain the same expected returns but reduce your risk by investing in a portfolio of many assets rather than investing in only one or a few assets. ………What has been questioned is the applicability of diversification. In fact, in the 2007-09 financial crisis, portfolios that were supposed to be well diversified and, therefore, protected from the risk of large losses actually lost significant value. For example, those invested in the S&P 500, which is, in itself, highly diversified (but consisting entirely of equities), would have lost 57% from the market’s peak (9 October 2007) to its bottom (9 March 2009).

Briefly discuss whether you agree or disagree with Moonn’sconcerns.

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