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An Empirical Analysis of Some Aspects of Common Stock Diversification

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  • Jennings, Edward H.

Abstract

Some recent empirical studies have concluded that the common stock investor can virtually eliminate diversifiable risk with a portfolio that contains a “small” number of separate common stock issues [5, 6, 10, 11, 13]. The conclusion has several important implications. One of the inherent limitations of a portfolio manager is his inability to evaluate an infinite number of securities. The seriousness of this problem is directly related to the risks associated with a “small” portfolio. The economic function of a mutual fund industry is to provide diversification and professional management. If it is assured that a “small” portfolio can virtually eliminate diversifiable risk, the necessity of these functions may be questioned. In addition, the strategy of concentration may be less “risky” than is commonly supposed. Finally, the modern portfolio models generally assume that portfolio additions are costless.

Suggested Citation

  • Jennings, Edward H., 1971. "An Empirical Analysis of Some Aspects of Common Stock Diversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(2), pages 797-813, March.
    • Handle: RePEc:cup:jfinqa:v:6:y:1971:i:02:p:797-813_02
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    Cited by:

    1. Vitali Alexeev & Mardi Dungey, 2015. "Equity portfolio diversification with high frequency data," Quantitative Finance, Taylor & Francis Journals, vol. 15(7), pages 1205-1215, July.
    2. K. Liagkouras & K. Metaxiotis, 2019. "Improving the performance of evolutionary algorithms: a new approach utilizing information from the evolutionary process and its application to the fuzzy portfolio optimization problem," Annals of Operations Research, Springer, vol. 272(1), pages 119-137, January.
    3. Alexeev, Vitali & Tapon, Francis, 2013. "Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets," Working Papers 2013-16, University of Tasmania, Tasmanian School of Business and Economics, revised 20 Nov 2013.
    4. Panagiotis Xidonas & George Mavrotas & John Psarras, 2010. "Equity portfolio construction and selection using multiobjective mathematical programming," Journal of Global Optimization, Springer, vol. 47(2), pages 185-209, June.
    5. P Xidonas & G Mavrotas & J Psarras, 2010. "A multiple criteria decision-making approach for the selection of stocks," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(8), pages 1273-1287, August.
    6. Florin Aliu & Besnik Krasniqi & Adriana Knapkova & Fisnik Aliu, 2019. "Interdependence and Risk Comparison of Slovak, Hungarian and Polish Stock Markets: Policy and Managerial Implications," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 69(2), pages 273-287, June.
    7. K. Liagkouras & K. Metaxiotis, 2018. "A new efficiently encoded multiobjective algorithm for the solution of the cardinality constrained portfolio optimization problem," Annals of Operations Research, Springer, vol. 267(1), pages 281-319, August.
    8. Vitali Alexeev & Francis Tapon, 2014. "The number of stocks in your portfolio should be larger than you think: diversification evidence from five developed markets," Published Paper Series 2014-4, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    9. Nuhiu Artor & Aliu Florin & Peci Bedri, 2022. "Assessing the diversification risk of a single equity market: evidence from the largest European stock indexes," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 58(1), pages 3-16, March.
    10. K. Liagkouras & K. Metaxiotis & G. Tsihrintzis, 2022. "Incorporating environmental and social considerations into the portfolio optimization process," Annals of Operations Research, Springer, vol. 316(2), pages 1493-1518, September.
    11. David Bradfield & Brian Munro, 2017. "The number of stocks required for effective portfolio diversification: the South African case," South African Journal of Accounting Research, Taylor & Francis Journals, vol. 31(1), pages 44-59, January.

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