Explain the two basic risks that are inherent in developing any financial portfolio. Be sure to identify which risks are reduced with the creation of a portfolio, and the factors that affect the types of risk that are managed within the portfolio. As part of your answer, be sure to answer the question- how many securities does it take to effectively diversify a portfolio- the answer of which is to be found in Chapter 5 reading in figure 5.3.

Tying it all Together

Since mutual funds are collections of securities that are essentially a managed portfolio, the same rules of risk and return apply. From your readings on the Efficient Market Hypothesis, do you believe that mutual funds outperform the market as a whole? Explain.