 How efficient is naive portfolio diversification? an educational noteGordon Y. N. Tang Omega, 2004, vol. 32, issue 2, 155-160 Abstract: Standard textbooks of Investment/Financial Management teach that although portfolio diversification can help reduce investment risk without sacrificing the expected rate of return, the benefit of diversification is exhausted with a portfolio size of 10-15. Since by then, most of the diversifiable risk is eliminated, leaving only the portion of systematic risk. How valid is this "common" knowledge? What is the exact value of "most" in the above statement? This paper examines the issue on naive (equal weight) diversification and analytically shows that for an infinite population of stocks, a portfolio size of 20 is required to eliminate 95% of the diversifiable risk on average. However, an addition of 80 stocks (i.e., a size of 100) is required to eliminate an extra 4% (i.e., 99% total) of diversifiable risk. This result depends neither on the investment horizons, sampling periods nor the markets involved. Keywords: Naive; diversification; Efficiency; Portfolio; Diversifiable; risks (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jomega:v:32:y:2004:i:2:p:155-160 Ordering information: This journal article can be ordered from Access Statistics for this article Omega is currently edited by B. Lev More articles in Omega from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.