Equity Portfolio Diversification: How Many Stocks Are Enough? Evidence From India

19 Pages Posted: 22 Feb 2021

See all articles by Rajan Raju

Rajan Raju

Invespar Pte Ltd

Sobhesh Kumar Agarwalla

Indian Institute of Management (IIM) Ahmedabad

Date Written: February 21, 2021

Abstract

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

Suggested Citation

Raju, Rajan and Agarwalla, Sobhesh Kumar, Equity Portfolio Diversification: How Many Stocks Are Enough? Evidence From India (February 21, 2021). Available at SSRN: https://ssrn.com/abstract=3790117 or http://dx.doi.org/10.2139/ssrn.3790117

Rajan Raju (Contact Author)

Invespar Pte Ltd ( email )

Singapore

Sobhesh Kumar Agarwalla

Indian Institute of Management (IIM) Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India
91.79.71524865 (Phone)

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