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It is acknowledged by researchers and practitioners alike that risk reduction through portfolio diversification provides significant economic benefits. Less obvious is the size of the portfolio one would need to receive 50% or 90% of the possible benefits. If ownership of 100 securities is necessary to achieve half the possible risk reduction, diversification would be of practical use only for institutions and the extremely wealthy. Numerous empirical studies have examined this question, and most conclude that effective diversification is possible with a surprisingly small number of securities if the securities are chosen at random. The force of this evidence is reduced because all but two of these studies assigned equal weights to the securities selected for a portfolio. There can be no presumption that equal weights are optimal, and the evidence cannot be conclusive unless optimal weights are used. I. Earlier StudiesIn a seminal work in this area, Evans and Archer [4] concluded that there is relatively little economic justification for increasing portfolio sizes beyond ten or so randomly selected securities. Latane and Young [9] verified Evans and Archer's results, finding that an eight-stock portfolio achieves 85 percent of the possible gains through diversification. Fisher and Lorie [5] have also confirmed that increasing the number of stocks in a portfolio rapidly exhausts the variability present in a one-stock portfolio. For example, they found that while roughly 40% of the achievable reduction is obtained by holding two stocks, eight stocks reduce 80% of the dispersion. Sharpe [14, p. 130] agreed that "a little diversification can go a long way toward reducing risk." He suggested that a portfolio containing fifteen or so securities may be considered well-diversified. Elton and Gruber [2] reached the same conclusion from an analytical solution of the relationship between risk and portfolio size. Finally, Mokkelbost [12] also found that a major portion of the achievable reduction is accomplished when "relatively few" different securities are included in the portfolio.Two recent studies have questioned whether portfolios of only 10 to 20 securities sufficiently reduce variation. Lorie [10] argued that even small departures from perfect diversification create substantial amounts of risk. Concentrating on the variance in independent returns for different size portfolios, he showed that a choice of 50 stocks out of the Standard and Poor's 500 Index could produce annual returns that vary as much as four and one-half percentage points from the returns for the entire 500 stocks. Moreover, even as large a portfolio as 100 stocks might differ as much as three percentage points from the 500 stock index. Using Fisher and Lorie's earlier data, Upson, Jessup, and Matsumoto [15] make much the same point when they argue that small portfolios suffer

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UNTIL RECENTLY most economists agreed that Federal Reserve monetary policy had little effect on real-spending decisions. This opinion-supported by a considerable empirical literature-was based on two allegations: (1) that the Federal Reserve has little effect on interest rates, and (2) that interest rates are not a significant factor in decisions concerning consumption or investment expenditures. Perhaps the most interesting counterargument is the notion that Federal Reserve credit policy operates in the economy not through its effect on borrowers, but through its effects on lenders. This has become known as the Availability Doctrine. Although the doctrine's first formal statement is only about 20 years old, its origin goes back to the 1920's. Recently it has undergone criticism which has considerably improved its rigor.Given that this hypothesis remains generally accepted by both central bankers and commercial bankers, it seems desirable to study it in detail. This is the purpose of this work. The study seeks answers to two basic questions: (1) Is the Availability Doctrine based on assumptions consistent with the usual postulates of rational decisionmaking? (2) What is the effect of availability limitations on the spending plans of economic units?The first question can be answered in the affirmative. An explanation of non-price rationing of credit is sought with considerable success in the study of (a) decisionmaking under conditions of uncertainty and (b) relationships among firms in a market characterized by imperfect competition. However, this discussion leads to the conclusion that availability effects are likely to affect small firms but not large. This is not surprising given the facts that higher risk is associated with smaller firms and that imperfectly competitive markets tend to favor the larger establishments.The answer to the second question requires that credit rationing be measured empirically. However, a direct measure of the extent on non-price rationing in credit markets is impossible since the variable sought-the amount of credit desired but not received-is not observable. This necessitates the use of a proxy variable that could be expected to move in a predictable manner when rationing appears. A number of variables that might be correlated with rationing are factor-analyzed in the hope that a common factor could be found to identify with rationing effects. The most-promising series extracted relates mainly to the percentage of new bank loans being granted to large firms. This is in accordance with the argument that the mostplausible explanations for rationing imply discrimination against small firms.The research concludes with studies of plant and equipment investment and of inventory accumulation by manufacturing firms. Investment data published by the Department of Commerce and the National Industrial Conference Board make it possible to break down investment expenditures into two broad asset-size categories. The FTC-SEC Quarterly Financial Reports give sales, inventories, and balance sheet...