How Many Stocks Make a Diversified Portfolio? Journal of Financial and Quantitative Analysis by Statman, Anacom Journals
The
risk of any stock portfolio depends on the proportion of the individual stock,
variances and covariance. This journal examined how many stocks make a
diversified portfolio. Evans and Archer (9) posit that the risk on a portfolio
declines as the number of different stocks in it increase and approximately
ten
stocks will do, this was widely accepted and cited in many current text books
but was it correct? It is in line with the above that this study sought to: (i)
show how many stock make a diversified portfolio, (ii) evaluate risk reduction
benefit of diversification, (iii) compare and ascertain level of
diversification observed in studies of individual investor’s portfolio.
METHODOLOGY
The
research design adopted was the ex-post factor design. The researcher simply
analysed the observation of the reported variable in Wall Street Journal,
Vanguard Index Trust, findings of the Ibboston Associates. Standard and poor
(S&P) 500 stock Index, The scope of the work is five hundred listed stock
and period covered is 1926 to
1984.Parametric statistic in form of expected return, standard deviation
arithmetic mean and other electronic media.
RESULTS
The
key finding derived from the study was that a well-diversified stock portfolio
is made up of at least thirty (30) stocks for a borrowing investor and forty
(40) for a lending investor and this result contradicts earlier results quoted
in many text books. The result of the comparison of diversification benefit and
cost using return as a measure, showed that the benefit of diversification for
stock portfolio are exhausted when the number of stock reached ten to fifteen.
Finally, observation of individual portfolio provide only limited information
about the level of diversification in their overall portfolio, that people
forgo available opportunities for diversification and transaction cost are not
likely to provide a complete explanation for that.
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