Portfolio diversification for long holding periods: how many stocks do Canadian investors need?
Date
2002-11
Authors
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Publisher
ORCID
Type
Degree Level
Masters
Abstract
The number of stocks required to achieve diversification has been under
discussion for over four decades. Traditionally, it is viewed that between 8 to 20 stocks
are adequate for a 'well' diversified portfolio based on American studies, and 30 to 50
stocks based on a Canadian study. The majority of the past literature has used American
data with a focus on the short-term investment horizon. Cleary and Copp's (1999) paper
is the only study that utilized Canadian data with an emphasis on the short-term
investment horizon.
To fill this void, this thesis examines the cumulative rates of return over a 20-year
investment horizon by randomly investing $100,000 initially across 100 Canadian firms.
The results of the simulation illustrate the probability distributions of the shortfall risks
for individuals who own fewer than 100 stocks. To see if diversifying across industry
groups reduces the shortfall risk faced by investors, a similar simulation is completed for
investing randomly across Canada's four prime industry groups.
The empirical results of this thesis suggest that the standard recommendation of 8
to 20 is inadequate for a long-term Canadian investor. More than 80 Canadian companies
are required to obtain a shortfall risk amount of less than 5% ($57,929) of the 100-stock
portfolio when investing randomly in Canadian companies.
Note:Pages 35, 36, 39, and 40 contain numbers that have been cut off in the original thesis. This problem is not attributed to digitization of the document.
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Degree
Master of Science (M.Sc.)
Department
Finance and Management Science
Program
Finance and Management Science