The reason is that it alters their perception of risk. Stocks expose us to two types of risk.
Unique risk affects one company or industry.
The recent NBA lockout could be considered a type of unique risk. Its effect on shoe sales, especially basketball shoes, has been dramatic. Estimates for fourth quarter U.S. basketball s hoe sales are down by 25 percent. As a result, if you are holding stock in one of the leading athletic shoe companies, like Nike, Reebok, or Adidas, you are probably crying theblues. You can come close to eliminating unique risk by diversifying your stocks.