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Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets

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Abstract

In this study of five developed markets we analyse the sizes of portfolios required for achieving most diversication benefits. Using daily data, we trace the year-to-year dynamic of these sizes between 1975 and 2011. We compute several widely-accepted measures of risk and use an extreme risk measure to account for black swan events. In addition to providing portfolio size recommendations for an average investor, we estimate confidence bands around central measures of risk and offer recommendations for attaining most diversification benefits 90 percent of the time instead of on average. We find that investors concerned with extreme risk can achieve diversification benefits with a relatively small number of stocks.

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  • Alexeev, Vitali & Tapon, Francis, 2013. "Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets," Working Papers 2013-16, University of Tasmania, Tasmanian School of Business and Economics, revised 20 Nov 2013.
  • Handle: RePEc:tas:wpaper:17313
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    File URL: http://eprints.utas.edu.au/17313/1/2013-16_Alexeev_and_Tapon_-_Equity_portfolio_diversification.pdf
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    Cited by:

    1. Alexeev, Vitali & Tapon, Francis, 2014. "How many stocks are enough for diversifying Canadian institutional portfolios?," Working Papers 2014-08, University of Tasmania, Tasmanian School of Business and Economics, revised 2014.
    2. Alexeev, Vitali & Tapon, Francis, 2013. "What Australian investors need to know to diversity their portfolios," Working Papers 2013-17, University of Tasmania, Tasmanian School of Business and Economics, revised 20 Nov 2013.

    More about this item

    Keywords

    Portfolio diversification; international investing; heavy tailed risk; expected shortfall; time series standard deviation; terminal wealth standard deviation;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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