Question

Why should a portfolio be diversified. What's a limit to diversification?

Answer 1

Diversification of a portfolio is done inorder to reduce the inherent risk of holding one stock or only stocks from a particular industry.

But one should take care not to be overdiversified.

The research shows that there is little difference between owning 20 stocks and more than 1000 stocks as the risk reduction and diversification bryond 20th stock is very less.

Diversification helps in reducing volatility and risk. Research shows that owning as few as 20 well diversified stocks helps in reducing price volatility and risk.