How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature

Using extensive and comprehensive databases to select a subset of research papers, we aim to critically analyze previous empirical studies to identify certain patterns in determining the optimal number of stocks in well-diversified portfolios in different markets, and to compare how the optimal numb...

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Autores principales:	Azra Zaimovic, Adna Omanovic, Almira Arnaut-Berilo
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	portfolio size diversification asset allocation stocks systematic risk unsystematic risk Risk in industry. Risk management HD61 Finance HG1-9999
Acceso en línea:	https://doaj.org/article/f2eb1c1aedf84345af5df50420175441
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spelling	oai:doaj.org-article:f2eb1c1aedf84345af5df504201754412021-11-25T18:08:44ZHow Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature10.3390/jrfm141105511911-80741911-8066https://doaj.org/article/f2eb1c1aedf84345af5df504201754412021-11-01T00:00:00Zhttps://www.mdpi.com/1911-8074/14/11/551https://doaj.org/toc/1911-8066https://doaj.org/toc/1911-8074Using extensive and comprehensive databases to select a subset of research papers, we aim to critically analyze previous empirical studies to identify certain patterns in determining the optimal number of stocks in well-diversified portfolios in different markets, and to compare how the optimal number of stocks has changed over different periods and how it has been affected by market turmoil such as the Global Financial Crisis (GFC) and the current COVID-19 pandemic. The main methods used are bibliometric analysis and systematic literature review. Evaluating the number of assets which lead to optimal diversification is not an easy task as it is impacted by a huge number of different factors: the way systematic risk is measured, the investment universe (size, asset classes and features of the asset classes), the investor’s characteristics, the change over time of the asset features, the model adopted to measure diversification (i.e., equally weighted versus optimal allocation), the frequency of the data that is being used, together with the time horizon, conditions in the market that the study refers to, etc. Our paper provides additional support for the fact that (1) a generalized optimal number of stocks that constitute a well-diversified portfolio does not exist for whichever market, period or investor. Recent studies further suggest that (2) the size of a well-diversified portfolio is larger today than in the past, (3) this number is lower in emerging markets compared to developed financial markets, (4) the higher the stock correlations with the market, the lower the number of stocks required for a well-diversified portfolio for individual investors, and (5) machine learning methods could potentially improve the investment decision process. Our results could be helpful to private and institutional investors in constructing and managing their portfolios and provide a framework for future research.Azra ZaimovicAdna OmanovicAlmira Arnaut-BeriloMDPI AGarticleportfolio sizediversificationasset allocationstockssystematic riskunsystematic riskRisk in industry. Risk managementHD61FinanceHG1-9999ENJournal of Risk and Financial Management, Vol 14, Iss 551, p 551 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	portfolio size diversification asset allocation stocks systematic risk unsystematic risk Risk in industry. Risk management HD61 Finance HG1-9999
spellingShingle	portfolio size diversification asset allocation stocks systematic risk unsystematic risk Risk in industry. Risk management HD61 Finance HG1-9999 Azra Zaimovic Adna Omanovic Almira Arnaut-Berilo How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature
description	Using extensive and comprehensive databases to select a subset of research papers, we aim to critically analyze previous empirical studies to identify certain patterns in determining the optimal number of stocks in well-diversified portfolios in different markets, and to compare how the optimal number of stocks has changed over different periods and how it has been affected by market turmoil such as the Global Financial Crisis (GFC) and the current COVID-19 pandemic. The main methods used are bibliometric analysis and systematic literature review. Evaluating the number of assets which lead to optimal diversification is not an easy task as it is impacted by a huge number of different factors: the way systematic risk is measured, the investment universe (size, asset classes and features of the asset classes), the investor’s characteristics, the change over time of the asset features, the model adopted to measure diversification (i.e., equally weighted versus optimal allocation), the frequency of the data that is being used, together with the time horizon, conditions in the market that the study refers to, etc. Our paper provides additional support for the fact that (1) a generalized optimal number of stocks that constitute a well-diversified portfolio does not exist for whichever market, period or investor. Recent studies further suggest that (2) the size of a well-diversified portfolio is larger today than in the past, (3) this number is lower in emerging markets compared to developed financial markets, (4) the higher the stock correlations with the market, the lower the number of stocks required for a well-diversified portfolio for individual investors, and (5) machine learning methods could potentially improve the investment decision process. Our results could be helpful to private and institutional investors in constructing and managing their portfolios and provide a framework for future research.
format	article
author	Azra Zaimovic Adna Omanovic Almira Arnaut-Berilo
author_facet	Azra Zaimovic Adna Omanovic Almira Arnaut-Berilo
author_sort	Azra Zaimovic
title	How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature
title_short	How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature
title_full	How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature
title_fullStr	How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature
title_full_unstemmed	How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature
title_sort	how many stocks are sufficient for equity portfolio diversification? a review of the literature
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/f2eb1c1aedf84345af5df50420175441
work_keys_str_mv	AT azrazaimovic howmanystocksaresufficientforequityportfoliodiversificationareviewoftheliterature AT adnaomanovic howmanystocksaresufficientforequityportfoliodiversificationareviewoftheliterature AT almiraarnautberilo howmanystocksaresufficientforequityportfoliodiversificationareviewoftheliterature
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How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature

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