RiskMetrics - NASDAQ 100 diversification


NASDAQ 100 diversification

Take the NASDAQ 100 Index as an example. The graph below ranked the RiskGrades of all 100 stocks that constituted the index as of April 28 2000. RiskGrades ranged from 210 (ADLAC) to 1316 (BVSN), and the average stock's RiskGrade was 550. The NASDAQ 100 Index RiskGrade was 326. How can the NASDAQ 100 Index RiskGrade be over 40% lower than the RiskGrade of the average stock that makes up the index? You guessed it: diversification.

This graph shows that you can dramatically lower risk through diversification: compared to the average NASDAQ 100 stock, you can expect to reduce your risk by over 40% by owning index. The more investments, the lower the chance of everything going wrong at once.

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