Question

“The risk-reducing benefits of diversification do not occur meaningfully until at least 30 individual securities are...

“The risk-reducing benefits of diversification do not occur meaningfully until at least 30

individual securities are included in the portfolio.” Do you agree? Explain why or why not.

In your answer make reference to the recent credit crisis and resulting stock market crash.

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Answer #1

Answer of this question is both yes and no because there is chance that if the portfolio has 30 stock but all from the same sector then there will be no diversification benefit so to get diversificaion benefit one should invest in differnt stocks. 30 number of stock from different sector mainly eliminate most of the diversifiable risk like if there is any risk in on sector then investing in different sector can minimize the total risk due to less than one correlation between the stocks. It is true that one should include at least 30 stock because at that point the correlation affect reduces the risk of the portfolio.

As we can see that during recent market crisis due to COVID-19 there is plunge is most the stock but few sectors are doing good like pharma, edutech, technology etc., So if one properly diversify the his stock portfolio then he can reduce the risk during this market shock.

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