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All M1 Assets Are Included in M2

question 98

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All M1 assets are included in M2.We will call those assets that are part of M2 but not part of M1,"M2 assets".You have just received $5,000 that you must hold as either an M1 asset or an M2 asset.What are the costs and benefits of holding the $5,000 as an M1 asset rather than as an M2 asset? Explain.


Definitions:

Unique Risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called firm-specific risk, nonsystematic risk, or diversifiable risk.

Diversification

Diversification is an investment strategy that aims to reduce risk by allocating investments among various financial instruments, industries, geographic locations, or other categories.

Portfolio

A collection of investments, such as stocks, bonds, commodities, and real estate, held by an individual or an institution.

Index Model

A statistical model to estimate the returns of a stock based on the returns of a broader market index.

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