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How many stocks are enough for diversifying Canadian institutional portfolios?

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Portfolio risk is a function of the number of stocks held in portfolios. We simulate portfolios using daily observations for all traded and delisted equities in Canada from 1975 to 2011 and we calculate several measures of risk, including heavy-tailed to account for black swan events. For each risk measure, we calculate the average number of portfolio holdings and the upper limits of these holdings to assure investors of a specific reduction in diversifiable risk. In contrast to previous literature that suggests 10-15 stocks are enough to provide adequate diversification for an average investor, we find that in fact more than 50 stocks are needed to achieve the same level of diversification most of the time instead of on average.

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File URL: http://eprints.utas.edu.au/17836/1/2014-08_Alexeev.pdf
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Paper provided by University of Tasmania, Tasmanian School of Business and Economics in its series Working Papers with number 2014-08.

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Length: 12 pages
Date of creation: 2014
Date of revision: 2014
Publication status: Published by the University of Tasmania, Discussion paper 2014-8
Handle: RePEc:tas:wpaper:17836
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Web page: http://www.utas.edu.au/business-and-economics

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  1. 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.
  2. 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.
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