Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets

In this study of five developed markets we analyse the sizes of portfolios required for achieving most diversification benefits. Using daily data, we trace the year-to-year dynamic of these sizes between 1975 and 2011. We compute several widely-accepted measures of risk and use an extreme risk measure to account for black swan events. In addition to providing portfolio size recommendations for an average investor, we estimate confidence bands around central measures of risk and offer recommendations for attaining most diversification benefits 90 percent of the time instead of on average. We find that investors concerned with extreme risk can achieve diversification benefits with a relatively small number of stocks.