After combing through the data, you have noticed that firms hiring Fishergraduates earn average abnormal returns of 3% per year over the next few years. You are convinced that this is a genuine profit opportunity and so have decided to trade on it. You have $10,000 to invest and two options: (1) invest all $10,000 in one company that has just hired a Fisher graduate; (2) invest $1,000 in each of ten companies that have just hired Fisher graduates. Which choice is preferable, or does it not matter?

Investing strategies often involve balancing risk and potential return. In this scenario, the decision depends on your risk tolerance and diversification strategy.

Option 1: Investing all $10,000 in one company that hired a Fisher graduate carries higher risk. If that particular company performs exceptionally well, your return could be significant. However, if the company underperforms, the entire investment may suffer.

Option 2: Investing $1,000 in each of ten companies that hired Fisher graduates diversifies the investment across multiple companies. This strategy reduces the risk compared to placing all funds in a single company. If one company underperforms, the impact on the overall investment is less severe.

Considering the 3% average abnormal returns observed across firms hiring Fisher graduates, both options offer potential profits. However, option 2 provides better diversification and risk mitigation. By investing in multiple companies, the impact of poor performance in one company is cushioned by the success of others. Therefore, from a risk management perspective, option 2—investing in ten different companies with $1,000 each—would generally be preferable.