Celestila Moonn, a graduate concentrated in marketing and started a new job as a digital marketing analyst.

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Celestila Moonn, a graduate concentrated in marketing and started a new job as a digital marketing analyst. While Moonn started investing in 401K retirement plan, Moonn was pondering what is diversification. As she was researching to understand diversification and reads the following excerpt in The Wall Street Journal. 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).

Q 1: What is one important benefit of portfolio diversification? Is a portfolio with five stocks in different industries considered diversified?

Q 2: After reading the excerpt in The Wall Street Journal, should Moonn be concerned about the systematic risk and diversification her 401K retirement plan?