Question

why is too much diversification considered a negative thing when dealing in a mutual funds?
a. higher diversification means that the mutual fund costs a lot more and doesn’t provide as much profit.
b. when there is too much diversification in a mutual fund, great success in a single stock doesn’t make much of a difference in the overall progress of the fund.
c. if there are too many different investments, it would be too hard to keep track of them and some would inevitably get lost in the system.
d. greater diversification means a drastic increase in taxes, so most companies avoid overly diversifying the mutual fund.

please select the best answer from the choices provided

Explanation:

• Option A: Diversification doesn't inherently increase costs in a way that directly reduces profit proportionally, so this is incorrect.
• Option B: When a mutual fund is overly diversified, the impact of a single stock's success is diluted because the fund has so many investments. This aligns with the concept of diversification's effect on portfolio performance—too much diversification can make the fund behave more like the overall market, and individual strong performers don't move the needle much.
• Option C: Mutual funds have systems to track investments, and "getting lost in the system" is not a valid reason for negative views on over - diversification.
• Option D: There's no direct link between diversification and a drastic tax increase, so this is incorrect.

Answer:

B. When there is too much diversification in a mutual fund, great success in a single stock doesn't make much of a difference in the overall progress of the fund.