Exercise 2: Why 30 Different Stocks Isn't "Fully" Protected — Possible Solution
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The colleague's claim is only partly true because it conflates two
genuinely different kinds of risk this chapter distinguishes carefully
- and owning 30 different companies only addresses one of them.

WHAT OWNING 30 COMPANIES ACTUALLY PROTECTS AGAINST
Holding shares in 30 different companies is a real, meaningful form of
diversification against unsystematic (company-specific) risk. If any
one of those 30 companies suffered its own Enron-style collapse, the
damage to the overall portfolio would be limited to roughly that one
company's share of the total holdings, not the whole portfolio. This
part of the colleague's confidence is genuinely well-founded.

WHAT IT DOES NOT PROTECT AGAINST
This chapter's own real Black Monday example shows exactly the limit of
that protection. On 19 October 1987, the Dow Jones fell 22.6% in a
single day, the S&P 500 fell 20.47%, and all twenty-three major world
stock markets fell sharply at the same time - not one company, and not
even one country's market, but essentially the entire global stock
market moving together. Someone holding 30 different stocks that day
would still have owned 30 stocks that all fell together, because the
risk that materialized was systematic - it affected the whole market
class at once, not any individual company's own specific circumstances.

WHY THE NUMBER OF COMPANIES DOESN'T MATTER HERE
This is the key point the colleague's claim misses: owning 30 different
stocks instead of just one significantly reduces exposure to any single
company's own specific failure, but it does nothing to reduce exposure
to a risk affecting the entire stock market as an asset class. Owning
300 different stocks, all still stocks, would face the exact same
Black-Monday-style exposure that 30 stocks does, since the number of
individual companies held has no bearing on systematic risk at all.

WHY THIS MATTERS
This chapter's own later material on combining genuinely different
asset classes (not just many different stocks) is the real, direct
response to this exact limitation - true protection against
systematic risk requires holding assets whose returns aren't all
driven by the same underlying market forces, which owning many
individual stocks alone cannot achieve.

ANSWER: The colleague's claim is only partly true because owning 30
different companies genuinely reduces unsystematic (company-specific)
risk, but does nothing to reduce systematic (market-wide) risk - as
this chapter's own real Black Monday example shows, when essentially
the entire stock market fell together on 19 October 1987, holding many
different stocks provided no protection at all, since every one of them
was still exposed to the same market-wide decline. The number of
individual stocks held addresses only one of the two real risk
categories this chapter distinguishes, not both.

WHY THIS WORKS AS AN ANSWER
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This correctly separates the two risk categories the claim conflates,
uses the chapter's own real Black Monday figures to demonstrate the
specific limit, and explains why increasing the number of stocks held
doesn't change the underlying exposure to systematic risk.