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Financial planners | Finance homework help

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Financial planners and investment advisors often instruct their clients to hold a broad portfolio of investments to reduce the overall risk. Having a large number of uncorrelated or negatively correlated investments in one’s portfolio reduces the variance of the return on investment. At first blush, it might appear that the advisor is suggesting that investments are more attractive when grouped together. Contrast this with the risk aggregation bias discussed in this chapter. Is this diversification a good idea? If the investor were not allowed to diversify, should she still be willing to buy any single investment in the portfolio?

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