Which type of portfolio might a young investor who is not afraid of risk choose?
a) a portfolio with a high percentage of stocks
b) a portfolio with a high percentage of conservative mutual funds
c) a portfolio that is mostly cash
d) a portfolio with a high percentage of treasury bonds
The Correct Answer to the given question is option a) a portfolio with a high percentage of stocks
Answer Explanation for Question: Which type of portfolio might a young investor who is not afraid of risk choose?
A young investor who is not afraid of risk might choose a portfolio with a high percentage of stocks. There is no single correct answer to this question, even though it seems that many sources have an opinion about how many stocks to own in a portfolio.
Your investment portfolio should have an appropriate number of stocks based on several factors, including where you live, when you invest, how long you plan to invest, and how often you read the market news and are aware of your holdings.
It is primarily for minimizing risk exposure that investors diversify their capital among a variety of investment vehicles. Investors can reduce their unsystematic risk exposure through diversification by spreading out their investments across different companies and industries.
A well-diversified equity portfolio can effectively reduce unsystematic risk to near-zero levels, while maintaining the same expected return level as a portfolio with excess risk. For example, economic recessions can plunge the entire stock market.
This is not something investors can diversify away. However, academic research in the area of modern portfolio theory has demonstrated how diversifying away systematic risk can help investors.
The correct choice for a young investor who is not afraid of risk is option a) a portfolio with a high percentage of stocks.
This choice aligns with the general principles of investing for young individuals who have a longer investment horizon and can afford to take on higher levels of risk.
Let’s delve into the details of why this choice is appropriate and why the other options are not.
Option a) a portfolio with a high percentage of stocks:
A young investor has the advantage of time on their side. This means they can withstand the short-term fluctuations in the stock market and capitalize on the long-term potential for growth that stocks offer.
Here’s why this option is suitable for young investors:
Long Investment Horizon:
➨ Young investors typically have several decades ahead of them before they need to access their investments for major life expenses like retirement.
➨ Stocks historically have shown the potential for substantial long-term growth, outperforming other asset classes like bonds and cash over extended periods.
Risk Tolerance:
➨ The young investor, in this case, is not afraid of risk. Stocks are inherently riskier than other investment options, but they also have the potential for higher returns.
➨ A high percentage of stocks in the portfolio aligns with their risk appetite.
Diversification Possibilities:
➨ While stocks can be volatile individually, a diversified stock portfolio can help mitigate risk.
➨ By investing in a variety of companies across different sectors and geographic regions, the investor can spread risk and increase the chances of capturing the overall growth of the global economy.
Compounding Returns:
➨ Stocks offer the advantage of compounding returns, where earnings are reinvested to generate more earnings. Over time, this can lead to exponential growth in the value of the portfolio.
Ability to Weather Market Volatility:
➨ Young investors can weather market downturns more easily because they have the time to wait for markets to recover.
➨ In fact, market downturns can present buying opportunities for acquiring stocks at lower prices.
Now, let’s explore why the other options are not the best choice for a young investor:
Option b) a portfolio with a high percentage of conservative mutual funds:
➨ Conservative mutual funds typically invest in safer assets like bonds and may not provide the growth potential that stocks do.
➨ While they offer lower risk, they are less likely to generate substantial returns over the long term.
➨ For a young investor with a longer investment horizon, the focus should be on capitalizing on growth opportunities.
Option c) a portfolio that is mostly cash:
➨ A portfolio that is mostly cash is not an ideal choice for a young investor. Holding cash for an extended period can erode the purchasing power of their money due to inflation.
➨ Cash does not offer the potential for capital appreciation that stocks do, so it’s not the best choice for long-term wealth building.
Option d) a portfolio with a high percentage of treasury bonds:
➨ Treasury bonds are considered safe investments, but they typically provide lower returns compared to stocks.
➨ While they can play a role in a diversified portfolio to reduce risk, a high percentage of treasury bonds may not align with the growth objectives of a young investor.
➨ Bonds are more suitable for capital preservation and income generation, making them a better fit for investors with shorter time horizons or a lower risk tolerance.
In conclusion, a young investor who is not afraid of risk should choose a portfolio with a high percentage of stocks. This option aligns with their long investment horizon, risk tolerance, and the potential for long-term growth.
It’s important to note that while stocks offer significant growth potential, they also come with higher volatility, so it’s essential for the investor to maintain a diversified portfolio and periodically review and rebalance their investments to align with their financial goals and risk tolerance.
Additionally, seeking advice from a financial advisor can be valuable in constructing an appropriate investment strategy.
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MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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