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Diversification Versus Concentration......... and the Winner Is?

Danny Yeung (), Paolo Pellizzari (), Ron Bird () and Sazali Abidin
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Sazali Abidin: School of Management, Waikato University

No 18, Working Paper Series from The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney

Abstract: Diversification has its obvious benefits but its pursuit can involve a trade-off between risk-controls and returns. We investigate this trade-off by examining the relative performance of diversified versus concentrated portfolios both formed on the basis of the same stock preferences. Using US equity mutual funds as our data base, we establish that the concentrated portfolios achieve the better performance. This highlights the potential for investors to diversify across concentrated funds rather than have the funds do the diversification themselves. It also highlights that the stocks selection skills of the managers may be lost by their portfolio construction endeavours.

Pages: 24 pages
Date: 2012-09-01
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