Is the Diversification Benefit from Holding a Certain Number of Stocks a Reality or Myth?
Abstract
Whether holding a certain number of stocks in a portfolio provides full diversification benefit in different market cycles is an important question for portfolio management. Portfolio managers are also interested to know whether any significant difference in the optimum number of securities for deriving full diversification benefit exists between naive portfolios and differently weighted portfolios. The study concluded that naive portfolios should hold between 9 to 15 stocks to get full diversification benefit. Surprisingly, the study did not find any definite number of stocks differently weighted portfolios should hold to get full diversification benefit.