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Open Access Publications from the University of California

Number of Stocks in Portfolio and Risk Reduction

  • Author(s): Zhou, Yuan
  • Advisor(s): Wu, Yingnian
  • et al.

A lot of studies have been done on the optimal portfolio size. But not that many of them started by learning the specific relationship between the size of a portfolio and the reduction of the risk. This study looks into this specific relationship and tries to model it. The first part uses data from the up-to-date stock market on a smaller portfolio size. The second part extends the study by including more stocks in the portfolio, up to 1/5 of what is on the market. In the last part, a different metric of return and risk is used to test the conclusion. All the three parts basically agree with the same decreasing asymptotic relationship. The ideal size of portfolio coming from this study would be around 10.

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