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Discuss which type of risk matters to rational investors and why. In addition, explain how investing...

Discuss which type of risk matters to rational investors and why. In addition, explain how investing in more than one asset can reduce risk through diversification.

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Investors are subject to face market risk, reinvestment risk, volatility risk, risk due to imbalance in equity and debt (non- diversification risk) etc. To balance the risk and return , a portfolio needs to have company shares held from different business lines of different industries. As one company's loss may be balanced off by other industrial gain. Shares invested in Oil and Energy can be tagged with Shares invested in Pharmaceuticals. Also a fund can be maintained by including debt and equity within it's portfolio. Thus this can avoid non-diversification risk to the rational investors.

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