Optimal Number of Stock Holdings in Mutual Fund Portfolios Based on Market Performance
Posted: 13 Aug 2005
Among the decisions most mutual fund portfolio managers make is the number of stocks to hold. We posit that there is an optimal number of stocks for each mutual fund, reflecting the trade-off between diversification benefits versus transactions and monitoring costs. We find a significant quadratic relation between number of stock holdings and risk-adjusted returns for U.S. equity mutual fund portfolios during 1992-2000. Moreover, we find that changes in the number of stocks held over time are more highly correlated with mutual fund flows than with funds' investment returns.
Keywords: Mutual funds, portfolio selection, risk-adjusted returns
JEL Classification: G11, G2
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