Portfolio Size and Diversification

SCMS Journal of Indian Management, Vol. 4, No. 1, January-March 2007

6 Pages Posted: 3 Apr 2007

See all articles by Lokanandha Reddy Irala

Lokanandha Reddy Irala

School of Management Studies, University of Hyderabad

Prakash Patil

HSBC Technology Services

Abstract

The basic notion of stock diversification involves spreading out the investment over more than one stock to avoid excessive exposure to a single source of risk. While all portfolio principles are directed towards achieving diversification to minimize risk, diversification is not a free lunch. Adding each single stock - into a portfolio - will definitely reduce the risk but increases the cost (of research: time, money & effort). So there is a trade-off between reduced risk due to better diversification versus the increased costs (decreased return) from adding additional securities to the portfolio. So what is the optimal portfolio size?

The results from the study suggest that a very high degree of diversification is possible in India. A portfolio size of 10-15 stocks is found to be appropriate as the reduction in risk is only marginal there after.

Keywords: Portfolio Size, Diversification, Beta, Systematic Risk, Market Risk

JEL Classification: G11, G15, G19

Suggested Citation

Irala, Lokanandha Reddy and Patil, Prakash, Portfolio Size and Diversification. SCMS Journal of Indian Management, Vol. 4, No. 1, January-March 2007, Available at SSRN: https://ssrn.com/abstract=977763

Lokanandha Reddy Irala (Contact Author)

School of Management Studies, University of Hyderabad ( email )

Prof. CR Rao Marg
Gachibowli
Hyderabad, Telangana 500046
India
8247705022 (Phone)

HOME PAGE: http://www.irala.org

Prakash Patil

HSBC Technology Services ( email )

Kolkata
India
9177970909 (Phone)

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