1. buy the 50 stocks he recommends because this would be at worst a random selection and the diversification will ensure a market return.
2. buy the 50 stocks he recommends because you know that the firm's research department is highly rated.
3. give him a lecture on efficient markets and leave.
4. ask him to see a plot of the market value of the 50 stock portfolio for the past 20 years along with the market values of well-known market indexes like the TSX300.
The best answer is option 4. Since the research department's advice is being given out by brokers all over the world, any information it contains will already be in the value of the shares. The portfolio is well diversified, but at this point you have no idea how risky it is. To find out you have to plot the market value for as long a period in the past as is possible and compare both the growth of market value and its variability with that of some market portfolio like the TSE 300.
If the broker tells you that what is past is past and his firm is oriented toward future profitability, give him a lecture on efficient markets. The principle of efficient markets tells us that all available existing information is incorporated in current asset values---new information is just as likely to affect asset values negatively as positively. For the broker's claim about his company's research department to be true, it has to do better than other research departments in interpreting existing information. And, in addition, you have to be one of the very few people to recognize its special competence, since the advice generated by the department is widely distributed. Widespread recognition of the department's expertise will lead to immediate adjustments of asset prices to reflect its on-going advice.
Indeed, the most important contribution a financial advisor can make (apart from carrying out for you the actual purchase and sale of assets) is to help you identify and manage risk. A competent financial advisor has the resources and knowledge to provide information to clients about the degree of non-diversifiable risk involved in holding various assets. While this information is public in the sense that anyone can acquire it with an expenditure of resources, those of us whose expertise lies elsewhere should not do so for the same reason that we should not spend our time learning how to make our own shoes. There is a gain from specialization.
You should look at both the average return to a prospective portfolio and the variability of its returns relative to the returns of other portfolios and the correlation of those returns with the returns to other porfolios for as far into the past as possible in order to get an idea of the risk that investment in it would involve. Of course, the past is not an iron-clad guide to the future. Information about variability of the average return to a portfolio in the past is not useful if major changes in variability of many stocks in it occur, but changes in the performance of any individual stock or a small number of stocks cannot produce major changes in the performance of a properly diversified portfolio.
The raw variability of individual stocks is not the essential thing to look at because what matters is the degree to which the stock fluctuates with the ups and downs of the market as a whole---idiosyncratic variability can be diversified away. Stocks that go up and down a lot as a market index like the TSX300 rises and falls add more risk to your portfolio than stocks that respond very little to movements in the market as a whole.
Option 1 is enticing because you seem to be getting both diversification and the research department's advice, for what that is worth. The problem with this option is that the research department does not select stocks randomly and presents you with no evaluation of the non-diversifiable risk. The department may have a particular view of where the economy is going that may be causing it to give heavy weight in the portfolio to stocks of a specific type---for example, resource stocks, high-tech companies, etc. The performance of the portfolio will depend on the shrewdness of these judgments. If you are tempted to follow option 1, you might be better to invest the funds in a mutual fund or diversify them across a number of mutual funds. Shares in a mutual fund are simply shares in a diversified portfolio, managed by professional portfolio managers according to some investment philosophy. The performances of individual funds depend on the wisdom of their managers. Good information is available on how various funds have performed during the past---this information does not affect the market values of the funds because the latter depend entirely on the market values of the collections of assets they own.
Mutual funds that hold portfolios of long-term bonds, short short-term bonds and commercial paper and mortgages also exist.