alleryStart learning →For an investor with only $1,000, what is the main appeal of a mutual fund?
AIt guarantees a return on the money invested
BIt removes every management fee and commission
CIt gives a diversified and thus less risky portfolio
DIt allows the investor to pick each security held
Answer & Solution
Correct answer: C. It gives a diversified and thus less risky portfolio
1. Mutual funds appeal to investors for three main reasons.
2. They are a good way to hold a diversified and thus less risky portfolio, since an investor with $500 or $1,000 cannot diversify much alone.
3. Buying shares in a fund gives part ownership of a portfolio that may contain 100 or more securities.
4. They are professionally managed, and they may offer higher returns than individual investors could achieve on their own.
5. Picking each holding is exactly what a fund investor gives up, since the fund manager makes those choices.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.6 Securities Markets_
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