We thank Cynthia J. Campbell (the editor) and three anonymous referees for helpful comments.
Diversification in Portfolios of Individual Stocks: 100 Stocks Are Not Enough
Article first published online: 16 NOV 2007
Volume 42, Issue 4, pages 557–570, November 2007
How to Cite
Domian, D. L., Louton, D. A. and Racine, M. D. (2007), Diversification in Portfolios of Individual Stocks: 100 Stocks Are Not Enough. Financial Review, 42: 557–570. doi: 10.1111/j.1540-6288.2007.00183.x
- Issue published online: 16 NOV 2007
- Article first published online: 16 NOV 2007
- investment horizon;
- Safety First;
- shortfall risk;
We examine returns and ending wealth in portfolios selected from 1,000 large U.S. stocks over a 20-year holding period. Shortfall risk, the possibility of ending wealth being below a target, is a useful metric for long horizon investors and is consistent with the Safety First criterion. Density functions obtained from simulations illustrate that shortfall risk reduction continues as portfolio size is increased, even above 100 stocks. A slightly lower risk can be achieved in small portfolios by diversifying across industries, but a greater reduction is obtained by simply increasing the number of stocks.