What Australian investors need to know to diversity their portfolios

Vitali Alexeev and Francis Tapon

No 2013-17, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: According to a report by the Australian Securities and Investments Commission in 2008, most (78%) of Australian investors had heard the term diversification. Nevertheless, around half of investors (49%) held only one type of investment (shares only) with the average number of holdings of 2.19 securities. More telling, a third (33%) of share owners acquired their shares passively (as part of a demutualisation or had received shares through an inheritance or gift), while almost two-thirds (63%) of share owners acquired the shares actively. One conclusion is that Australian investors, on average, own poorly diversified portfolios and leave themselves exposed to excessive diversifiable risk. To study this issue, we simulate portfolios using daily observations for all traded and delisted equities in Australia between 1975 and 2011. We calculate two measures of risk, including heavy tailed to account for extreme events. For each risk measure, we recommend the number of portfolio holdings that result in a 90% reduction in diversifiable risk for an average and a more conservative investor. We find that, on average, 24 to 30 stocks are sufficient to attain a well-diversified portfolio.

Keywords: Portfolio diversification; expected shortfall; standard deviation; Australian equities. (search for similar items in EconPapers)
Pages: 10 pages
Date: 2013-11-20, Revised 2013-11-20
New Economics Papers: this item is included in nep-rmg
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Published by the University of Tasmania. Discussion paper series N 2013-17

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