Mathew's 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that invests only in investment grade corporate bonds and a fund that that invests only in government bonds. Mathew allocates 20% of his money to each fund. Which of the following statements offers the best critique of Mathew's "1/N" allocation?
A) Mathew may not be as well diversified as he thinks because the three stock funds probably own many of the same stocks.
B) He should have allocated on 1/3 to stocks and 1/3 to each of the remaining funds.
C) His plan does not provide sufficient liquidity.
D) There is nothing wrong with Mathew's plan.

Question

Quizplus · Accepted Answer

Mathew's allocation strategy might lead to an overlap in holdings among the three stock funds (S&P 500 Index Fund, large-cap stock fund, and blue chip stock fund), which can reduce the diversification benefits he might expect from spreading his investments across different funds.

Mathew's 401-K Plan Offers a Choice Between and S&P 500