Abstract

http://ssrn.com/abstract=1485712
 
 

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Experimental Evidence on Portfolio Size and Diversification: Your Mileage May Vary ... A Lot


Don M. Chance


Louisiana State University, Baton Rouge - Department of Finance; Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Andrei Shynkevich


Kent State University

Tung-Hsiao Yang


National Chung Hsing University

October 7, 2009


Abstract:     
This paper reports on the results of an experiment in which MBA student participants select securities at random for the purpose of reproducing the familiar exponentially declining relationship between portfolio volatility and number of securities. We find that the overall set of participants reproduces the pattern, but there is considerable variation within the participants. Somewhat similar results are even achieved with randomly selected securities, but the exponential pattern is observed more frequently. We examine potential differences in how humans ostensibly select random securities from how a random process selects securities. We find that the human participants tend to select larger companies with lower risk and that as a marginal security is added, that security is more correlated with the existing portfolio than when all securities are selected randomly. These results suggest that the process of achieving diversification when human beings select securities apparently at random is hindered by biases. It also suggests that there is wide variation from participant to participant, and therefore from investor to investor, in the relationship between diversification and the number of securities.

Number of Pages in PDF File: 43

Keywords: diversification, portfolio size, number of securities, experimental finance

JEL Classification: G11

working papers series


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Date posted: October 10, 2009 ; Last revised: December 29, 2009

Suggested Citation

Chance, Don M. and Shynkevich, Andrei and Yang, Tung-Hsiao, Experimental Evidence on Portfolio Size and Diversification: Your Mileage May Vary ... A Lot (October 7, 2009). Available at SSRN: http://ssrn.com/abstract=1485712 or http://dx.doi.org/10.2139/ssrn.1485712

Contact Information

Don M. Chance (Contact Author)
Louisiana State University, Baton Rouge - Department of Finance ( email )
2163 CEBA
Baton Rouge, LA 70803
United States
Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration
Baton Rouge, LA 70803-6308
United States
225-578-0372 (Phone)
225-578-6366 (Fax)
HOME PAGE: http://www.bus.lsu.edu/academics/finance/faculty/dchance/
Andrei Shynkevich
Kent State University ( email )
Kent, OH 44242
United States
Tung-Hsiao Yang
National Chung Hsing University ( email )
250, Kuo Kuang Road
Taichung, Taiwan
Taiwan
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