Investment planning

Purchasing common stock represents an equity ownership stake in a corporation, which offers the potential for long-term capital appreciation as the business grows. In contrast, stock returns are never guaranteed, making Option A incorrect because equity investments carry market risk and can lose value.

Modern Portfolio Theory (MPT) demonstrates that combining diverse assets in a portfolio can reduce overall risk for a given level of expected return. In contrast, picking a single best stock (Option A) ignores the benefits of diversification and exposes the investor to high unsystematic risk.

Modern Portfolio Theory (MPT) demonstrates that combining diverse assets in a portfolio can reduce overall risk for a given level of expected return. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.

• !Purchasing common stock represents an equity ownership stake in a corporation, which offers the potential for long-term capital appreciation as the business grows.

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