How Many Stocks Make a Diversified Portfolio? Journal of Financial and Quantitative Analysis by Statman, Anacom Journals

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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.
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. 
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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