Index funds and diversification in Saudi Arabia
Purpose – The purpose of this paper is to investigate how best to diversify in Saudi Arabia's stock market. Design/methodology/approach – The analysis proceeds as follows: first, repeated sampling with replacement from a sample of 62 actual companies' monthly stock returns from January 2001 to June 2006 is used to simulate the performance of various portfolio sizes; second, a modified Statman diversification model is used to evaluate the performance of index funds in Saudi Arabia and thus assess the size of a diversified portfolio. Findings – This paper reaches two important findings: first, due to high index funds fees, investors are better off diversifying by purchasing stocks directly from the stock market; second, a portfolio containing five randomly chosen stocks is sufficient to achieve diversification. Originality/value – This paper provides useful recommendations on how to achieve diversification. Additionally, it highlights the fact that index funds are too expensive to be useful in Saudi Arabia.
Volume (Year): 2 (2009)
Issue (Month): 3 (August)
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- Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001.
"Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk,"
3128707, Harvard University Department of Economics.
- John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
- John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," NBER Working Papers 7590, National Bureau of Economic Research, Inc.
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