Consider the following conversation and discuss how is each comment flawed or correct, and what would you tell these people to straighten them out?
Helen says: “When forming a portfolio, I would want to choose stocks from different industries. If I choose 4 stocks from different industries my portfolio will be diverse. I would then expect to have performance similar to the market portfolio as measured by the S&P 500.”
Sophia’s reply is “If you want to replicate the market, you’re better off buying a mutual fund like the Vanguard 500 Index fund. It is managed by a professional stock picker, and therefore will always do better than the S&P 500 for the same level of risk.”