Most companies 401(k) retirement plan has one more investment alternative beyond the stock portfolio, bond portfolio, and money market deposits: the companys own stock.

Many employees like to invest in the companys stock because they are so familiar with the company. We tend to think of familiar things and being better, which for many, means the higher expected return and lower risk. Of course, now that you have a financial education, you know that higher expected return does not come with lower riskjust the opposite: it comes with higher risk!

Nevertheless, most employees perceive the stock of their employer company to be a lower-risk investment. For example:

A survey asked: Which is more likely to lose half of its value, your firm or the overall stock market?

• 1,000+ responded
• only 16.4% stated their company

A survey to Vanguard pension clients asked: Would you say your employers stock is MORE RISKY, LESS RISKY, or has ABOUT THE SAME LEVEL OF RISK as an investment in a diversified stock fund with many different stocks?

• 33% of respondents felt that their Employers stock is riskier
• 39% felt that their Employers stock has about the same risk as a diversified stock fund, and
• 25% of respondents felt that investing solely in their employers stock was less risky than investing in a diversified stock fund

How far off are people's viewpoints? Consider the concepts of firm-specific risk vs portfolio risk? Which one is more real? What are ways to measure the risk of the firm vs the risk of the portfolio and how do we educate people on this?