Diversification of existing assets is one of the common ways to reduce the risks associated with earning income. However, there are several different points of view regarding the implementation of this technique. The study under consideration is devoted to the analysis of approaches to forming a portfolio of stocks from the perspective of diversification, emphasizing the number of assets included. The article’s author contrasts his calculations and opinions based on them with the then-popular approach from Evans and Archer, according to which ten shares are enough (Statman 353). This technique has been cited in many articles and textbooks because it was considered sufficient to reduce risk. In addition, according to these studies, owning more than ten shares is not worthwhile, as they will not bring adequate economic benefits from diversification. Statman opposes this approach, stating that a well-diversified portfolio should include 30 and 40 shares for borrowing and lending investors, respectively (Statman 353). Therefore, the entire article is devoted to providing evidence for a broader range of stocks than what Evans and Archer suggest.
For this, the author first assesses diversification as a phenomenon, highlighting its positive and negative aspects. He emphasizes that it is usually logical and desirable to use this method if the revenues and benefits are greater than the costs (Statman 354). However, in his calculations, the author uses returns as the main measured parameter. Thus, it is proposed to analyze risk reduction through diversification in return units using mathematical calculations and comparison of different portfolios. In this case, a portfolio containing 500 different stocks is used as a benchmark (Statman 355). As a result of the study, the author obtains several vital conclusions.
First, the Vanguard Index Trust has been found to have many more benefits for more extensive portfolios. Second, the calculations showed low reliability of using the standard distribution for a portfolio with many shares (Statman 360). Finally, the author concludes his paper with an analysis of the benefits of diversification and their prevalence, from which it follows that a minimal number of people have sufficiently diversified portfolios. Statman (362) discusses why people can ignore the obvious benefits of this method and how this situation can be corrected. However, he remains quite cautious and does not recommend implementing fully diversified portfolios for all investors.
Work Cited
Statman, Meir. “How Many Stocks Make a Diversified Portfolio?” Journal of Financial and Quantitative Analysis, vol. 22, no. 3, 1987, pp. 353-363.