Diversification
Chapters in this video
- 0:00 Cora's glow-in-the-dark toaster and unsystematic risk
- 1:01 Systematic risk: the market meltdown diversification cannot fix
- 1:48 Asset allocation: the systematic risk defense, not diversification
- 2:15 Unsystematic risk is not compensated by the market
- 2:46 How Series 6 products deliver diversification
- 3:20 Sector funds are not diversified across sectors
- 3:48 Balanced and target-date funds: asset-class diversification
- 4:13 The ICA 75-5-10 statutory test
- 5:54 Non-diversified funds are not automatically unsuitable
- 6:48 Rapid-fire exam recap
What this video covers
- Why diversification reduces only unsystematic (diversifiable) risk and leaves systematic market risk completely untouched
- How to distinguish a customer worried about "the market going down" (systematic risk, not fixable by diversification) from one worried about single-company exposure
- Why unsystematic risk is not compensated by the market, since diversification eliminates it for practically free
- How Series 6 products deliver diversification across issuers, asset classes, sectors, geographies, and maturities
- Why a sector fund is not diversified across sectors, even with hundreds of holdings, and why balanced funds and target-date funds are different
- The Investment Company Act of 1940 (ICA) 75-5-10 rule: 75% of assets diversified, no more than 5% per issuer, no more than 10% of an issuer's voting securities
- Why a non-diversified fund is not automatically unsuitable, and why changing a fund's diversification status requires shareholder approval as a fundamental policy change
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. The complete Series 6 course also includes adaptive practice questions and spaced-repetition flashcards.