Diversification in Portfolios of Individual Stocks: 100 Stocks are Not Enough

14 Pages Posted: 18 Nov 2007

See all articles by Dale L. Domian

Dale L. Domian

York University - School of Administrative Studies

David A. Louton

Bryant University - Department of Finance

Marie D. Racine

University of Saskatchewan - Edwards School of Business

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Abstract

We examine returns and ending wealth in portfolios selected from 1,000 large U.S. stocks over a 20-year holding period. Shortfall risk, the possibility of ending wealth being below a target, is a useful metric for long horizon investors and is consistent with the Safety First criterion. Density functions obtained from simulations illustrate that shortfall risk reduction continues as portfolio size is increased, even above 100 stocks. A slightly lower risk can be achieved in small portfolios by diversifying across industries, but a greater reduction is obtained by simply increasing the number of stocks.

Suggested Citation

Domian, Dale L. and Louton, David A. and Racine, Marie D., Diversification in Portfolios of Individual Stocks: 100 Stocks are Not Enough. The Financial Review, Vol. 42, No. 4, pp. 557-570, November 2007. Available at SSRN: https://ssrn.com/abstract=1030861 or http://dx.doi.org/10.1111/j.1540-6288.2007.00183.x

Dale L. Domian

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada
416-736-2100, x20009 (Phone)
416-736-5963 (Fax)

David A. Louton (Contact Author)

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States
401-232-6343 (Phone)
401-232-6319 (Fax)

Marie D. Racine

University of Saskatchewan - Edwards School of Business ( email )

Saskatoon, Saskatchewan S7N 5A7
Canada

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