Diversification in Portfolios of Individual Stocks: 100 Stocks are Not Enough

22 Pages Posted: 7 Jun 2006

See all articles by Dale L. Domian

Dale L. Domian

Memorial University of Newfoundland (MNU); York University - School of Administrative Studies

David A. Louton

Bryant University - Department of Finance

Marie D. Racine

University of Saskatchewan - Edwards School of Business

Date Written: April 2006

Abstract

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.

Keywords: diversification, investment horizon, Safety First, shortfall risk, simulations

JEL Classification: G11, C15

Suggested Citation

Domian, Dale L. and Domian, Dale L. and Louton, David A. and Racine, Marie D., Diversification in Portfolios of Individual Stocks: 100 Stocks are Not Enough (April 2006). Available at SSRN: https://ssrn.com/abstract=906686 or http://dx.doi.org/10.2139/ssrn.906686

Dale L. Domian

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada
416-736-2100, x20009 (Phone)
416-736-5963 (Fax)

Memorial University of Newfoundland (MNU)

Faculty of Business Administration
St. John's, Newfoundland A1B 3X5
Canada
709-737-4632 (Phone)
709-737-7680 (Fax)

David A. Louton (Contact Author)

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States
401-232-6343 (Phone)
401-232-6319 (Fax)

Marie D. Racine

University of Saskatchewan - Edwards School of Business ( email )

Saskatoon, Saskatchewan S7N 5A7
Canada

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