Ep20 "Risk and the Fundamental Tradeoff of Corporate Finance"
All Else Equal: Making Better Decisions
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How to Diversify Your Portfolio for Stock Investments
Jonathan Gruber: How do we put a stock portfolio together in terms of getting a diversified portfolio for our stock investments? Let's say we have 500 people in the investment club and we invest in the 500 stocks in the S&P 500 index. Each of the 500 people puts all their money in that one stock, which means each of us is completely exposed to whatever happens to happen to that company. But if we look at the level of risk each individual holds, it's much lower when we pool the risk in the S & P 500 index because some of the risk of stocks cancels out. You can leave your expect return the same and just reduce your risk by about half.
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