Explain why three technology funds are not necessarily three different sources of risk.
Different funds can hold the same companies. Check cumulative exposure, not just the number of funds.
Diversification is assessed across companies, sectors, countries and asset types. Two funds with similar holdings can duplicate the same exposure. Check holdings lists and weights, the data date, policy, fees, currency, distribution or accumulation and tracking differences. Diversification can reduce idiosyncratic risk but does not eliminate broad market declines. There is no single list of funds suitable for everyone.
Half the portfolio in Fund A which has 40% in a fictional company, and half in Fund B which has 20% in the same company. Total exposure to it is 50%×40% + 50%×20% = 30%.
Explain why three technology funds are not necessarily three different sources of risk.
An imaginary portfolio splits equally between two funds. The same company represents 40% of each fund. Overall exposure remains 40% of the portfolio: one half times 40%, plus one half times 40%. Two funds do not automatically mean different underlying companies. If that company represented only 10% of the second fund, combined exposure would be 25%. Check each fund’s holdings and weights, then add its contributions. Different fund names or managers do not guarantee different risks.
Concepts that help you compare
How does one fund unit represent a basket of stocks?
A unit in a fund gives a proportional share of a fund that holds assets; it is not one share in each company. The fund pools money and holds a basket according to its policy. One unit gives proportional exposure to the basket, even if each company's weight differs. The number of units you own is not the number of companies in the fund. The basket can include stocks, bonds or other assets. A fund can track an index or be actively managed. Read the investment policy and holdings—not just the name.
Comparison example: A fictional fund holds 60% in Company A and 40% in Company B. A holding valued at 100 ₪ in the fund roughly represents exposure of 60 and 40 ₪, before cash, costs and pricing differences.
Diversification is splitting investments among different assets and sectors. This reduces dependence on a single asset. Three companies in the same sector may behave similarly, so the number of holdings alone does not guarantee good diversification. A diversified portfolio can still fall when the market declines.
Comparison example: Three game companies depend on some of the same factors. Combining different sectors changes exposures.