Equity Portfolio Diversification: How Many Stocks Are Enough? Evidence From India
19 Pages Posted: 22 Feb 2021
Date Written: February 21, 2021
How many stocks are required to reduce unsystematic risk significantly is an important question for investors. While there is a large body of research on the subject in the United States, there is little formal work on this question in India. We show that a 15-20 stock portfolio, the traditional market rule-of-thumb for a diversified portfolio, is likely inadequate to minimize unsystematic risk. We show that an investor could target to reduce diversifiable risk by 90% with a 90% confidence with a portfolio of 40-50 stocks. We build a practical framework that serves as a baseline for investors to target a specific reduction in diversifiable unsystematic risk at a chosen confidence level.
Keywords: Portfolio Construction, Diversification, Time Series Standard Deviation
JEL Classification: G00, G11, C15
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