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Naive Diversification

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  • Dirk P.M. De Wit

Abstract

Some diversifiable risk is always left in a portfolio. The argument here is that the excess risk in a randomly selected portfolio of a given size should be compensated for. The analysis shows that the required excess return of an imperfectly diversified portfolio depends on just two parameters: the equity risk premium and the average correlation between stock returns.

Suggested Citation

  • Dirk P.M. De Wit, 1998. "Naive Diversification," Financial Analysts Journal, Taylor & Francis Journals, vol. 54(4), pages 95-100, July.
    • Handle: RePEc:taf:ufajxx:v:54:y:1998:i:4:p:95-100
    DOI: 10.2469/faj.v54.n4.2201
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