Journal of Investment Strategies
ISSN:
2047-1238 (print)
2047-1246 (online)
Editor-in-chief: Ali Hirsa
The number of stocks in your portfolio should be larger than you think: diversification evidence from five developed markets
Vitali Alexeev and Francis Tapon
Abstract
ABSTRACT
In this study of five developed markets, we analyze the sizes of portfolios required to achieve the most diversification benefits. We compute several widely accepted measures of risk and use an extreme risk measure to account for black swan events. In addition to providing portfolio size recommendations for an average investor, we estimate confidence bands around central measures of risk and offer recommendations for attaining the most diversification benefits 90% of the time, instead of on average. In contrast to previous literature that suggests between 10 and 15 stocks are enough to provide adequate diversification for an average investor, we find that in fact more than 73 stocks are needed to achieve the same level of diversification most of the time, instead of on average.
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