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Concept of systematic-idiosyncratic risks

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Ringo Fonebone, CFA invests his clients' money in a 50-stock portfolio comprised of his best ideas across the 11 market sectors. Following a recent meeting, the client stated the following: "Ringo, I trust your stock-picking ability and believe you should invest my money in your 10 best stock ideas instead of 50. Why dilute your ideas across 50 companies instead of your top 10 BEST ideas which relfect your strongest views? Furthermore, stocks are risky so as you add more stocks to the portfolio - especially those where you are less confident in their prospects. Wouldn't you be INCREASING the portfolio's risk? Critically evaluate the client's statement and how suggest how Ringo should respond. Include in your discussion, the concept of systematic & idiosyncratic risks and how these risks change with the number of stocks in a portfolio.

Reference no: EM132652695

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