The portfolio of Google, Caterpillar, and Merck is the most diversified of the three. The objective with diversification is to have a collection of stocks that do not move together and do not share the same risks. For example, when Google does poorly, Caterpillar might do well. The risk of having a portfolio concentrated in a single industry is that often industry stocks tend to move together, which is less likely if the companies are from different industries.

What do you think the "hedge" is in a Hedge Fund, and how would you manage the risk of investing in Merck without diversification? To think about this, imagine an investment that might do well when Merck does poorly.