Optimal Number of Stock Holdings in Mutual Fund Portfolios Based on Market Performance

Posted: 13 Aug 2005

See all articles by David M. Smith

David M. Smith

State University of New York at Albany - School of Business

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Abstract

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

Suggested Citation

Smith, David McNeil and Shawky, Hany A., Optimal Number of Stock Holdings in Mutual Fund Portfolios Based on Market Performance. Financial Review, Vol. 40, No. 4, November 2005. Available at SSRN: https://ssrn.com/abstract=774565

David McNeil Smith (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

HOME PAGE: http://www.albany.edu/ciim

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,533
PlumX Metrics