What Australian investors need to know to diversity their portfolios
According to a report by the Australian Securities and Investments Commission in 2008, most (78%) of Australian investors had heard the term diversification. Nevertheless, around half of investors (49%) held only one type of investment (shares only) with the average number of holdings of 2.19 securities. More telling, a third (33%) of share owners acquired their shares passively (as part of a demutualisation or had received shares through an inheritance or gift), while almost two-thirds (63%) of share owners acquired the shares actively. One conclusion is that Australian investors, on average, own poorly diversified portfolios and leave themselves exposed to excessive diversifiable risk. To study this issue, we simulate portfolios using daily observations for all traded and delisted equities in Australia between 1975 and 2011. We calculate two measures of risk, including heavy tailed to account for extreme events. For each risk measure, we recommend the number of portfolio holdings that result in a 90% reduction in diversifiable risk for an average and a more conservative investor. We find that, on average, 24 to 30 stocks are sufficient to attain a well-diversified portfolio.
|Date of creation:||20 Nov 2013|
|Date of revision:||20 Nov 2013|
|Publication status:||Published by the University of Tasmania. Discussion paper series N 2013-17|
|Contact details of provider:|| Postal: Private Bag 85, Hobart, Tasmania 7001|
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Web page: http://www.utas.edu.au/business-and-economics
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- Ron Bird & Mark Tippett, 1986. "Note---Naive Diversification and Portfolio Risk---A Note," Management Science, INFORMS, vol. 32(2), pages 244-251, February.
- John Y. Campbell, 2001.
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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.
- Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
- 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.
- Simone Brands & David R. Gallagher, 2005. "Portfolio selection, diversification and fund-of-funds: a note," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 185-197. Full references (including those not matched with items on IDEAS)
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