This paper examines the effect of portfolio diversification for stocks listed on the Malaysian stock exchange. We determine the extent to which the unsystematic risk component can be reduced through diversification posited by Modern Portfolio Theory. Prices of randomly selected stocks were obtained from Yahoo! Finance for the five year period starting from January 2010 to March 2014. In order to analyze the robustness of the empirical results, three sets of portfolios were tested in this study and each set contained 55 stocks. The total sample of 165 stocks was chosen from different sectors that are listed under Bursa Malaysia. In addition, the three samples were tested for two type of differencing intervals, daily and weekly, to obtain more robust results. The empirical findings of the study show that increasing the number of stocks in the sample portfolio leads to decreasing standard deviation (unsystematic risk) the investment portfolio for Malaysia Stock Market stocks until each portfolio is well-diversified. The uniqueness in this study is that the empirical results show that, the level of data frequency significantly influences changes in stock portfolio size required to obtain optimal portfolio diversification. Using the daily differencing interval, 45 stocks are need to eliminate unsystematic risk and using the weekly differencing interval, only 35 stocks are required to obtain a well-diversified portfolio.
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