The number of stocks required for effective portfolio diversification: the South African case

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

“…Most of the studies dealing with the necessary number of stocks to diversify the unsystematic risk were mainly conducted in the U.S. market (Evans and Archer 1968;Fielitz 1974;Statman 1987;Beck et al 1996;O'Neal 1997;Barber and Odean 2000;Statman 2002;Domian et al 2007;Benjelloun 2010;Diyarbakırlıo glu and Satman 2013;Alexeev and Tapon 2014;Zhou 2014;Oyenubi 2019;Kurtti 2020), while few have attempted to investigate this issue in other (underdeveloped) markets (Gupta and Khoon 2001;Brands and Gallagher 2005;Irala and Patil 2007;Alekneviciene et al 2012;Stotz and Lu 2014;Ahuja 2015;Bradfield and Munro 2017;Murthy 2018;Raju and Agarwalla 2021). Based on the results, most studies in the past have used the variance or standard deviation of returns as a metric to assess risk reduction (Evans and Archer 1968;Solnik 1974;Statman 1987;Beck et al 1996), and this has continued to be the authors' first choice in recent years (Brands and Gallagher 2005;Benjelloun 2010).…”

“…Just for comparison, early studies based on (semi-)annual and quarterly data have shown that 8 to 16 stocks are sufficient for optimal diversification (Evans and Archer 1968;Fielitz 1974;Zhou 2014). Some have used monthly data (Statman 1987;Beck et al 1996;Gupta and Khoon 2001;Statman 2002;Tang 2004;Brands and Gallagher 2005;Irala and Patil 2007;Dbouk and Kryzanowski 2009;Benjelloun 2010;Kryzanowski and Singh 2010;Stotz and Lu 2014;Kisaka et al 2015;Haensly 2020;Raju and Agarwalla 2021), but also weak data (Solnik 1974;Bradfield and Munro 2017;Oyenubi 2019;Lee et al 2020) or even daily data (Domian et al 2007;Alekneviciene et al 2012;Alexeev and Tapon 2012;Chong and Phillips 2013;Ahuja 2015). As Alexeev and Dungey (2015) further point out, high-frequency data undeniably improves risk assessment and brings significant benefits to decisionmaking.…”

“…Most previous studies on diversification effects and portfolio size have focused primarily on developed markets, and relatively few studies have considered emerging markets (Gupta and Khoon 2001;Brands and Gallagher 2005;Irala and Patil 2007;Kryzanowski and Singh 2010;Alekneviciene et al 2012;Stotz and Lu 2014;Ahuja 2015;Tripathi and Bhandari 2015;Bradfield and Munro 2017;Fang et al 2017;Ahmed et al 2018;Habibah et al 2018;Norsiman et al 2019;Raju and Agarwalla 2021). It is obvious that there are a whole range of factors that distinguish emerging from developed markets, such as size, liquidity or regulation (Kiymaz and Simsek 2017).…”

“…Numerous studies have shown that the traditional rule of thumb of 8-10 stocks established by the pioneering study of Evans and Archer (1968) is indeed sufficient to achieve optimal diversification effects, but on the other hand numerous works, especially recently, have challenged this fact by showing that 30-50 stocks are required for maximum diversification effect (Benjelloun 2010;Chong and Phillips 2013;Alexeev and Tapon 2014;Bradfield and Munro 2017;Oyenubi 2019;Kurtti 2020;Raju and Agarwalla 2021) or even 100 stocks or more (Statman 2002;Domian et al 2007;Diyarbakırlıo glu and Satman 2013).…”

Investor Competence and Decision Familiarity Bias Analysis for Portfolio Diversification

“…Previous study of Bradfield and Munro (2017) found that it takes 15 to 30 stocks to effectively reduce the risk of 90% -95% in an investor's portfolio. This is evidence of the importance of portfolio diversification for investors, where the composition of the number of stocks that make up the portfolio reduces risk to a certain point.…”