How Many Alternative Eggs Should You Put in Your Investment Basket?

Clare, A. & Motson, N. (2008). How Many Alternative Eggs Should You Put in Your Investment Basket?. London: Cass Business School, City University London.

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There is some debate about how many stocks can effectively eliminate most of the unsystematic risk in an equity portfolio. Estimates range from ten to 40. Given the growing proliferation of pooled investment vehicles aimed at the UK's pension fund industry, where these pools consist of various combinations of alternative asset classes and alternative investment strategies, in this paper we investigate the limits of diversification amongst these less conventional investments. Our results indicate that 40per cent of the time series risk can be eliminated by combining eight strategies, but only a further four per cent from combining 12. We also find that an investor could reduce 60per cent of the dispersion in terminal wealth of an alternative investment basket - which is arguably what investors should really be concerned with - by combining six of these less conventional asset approaches to investment, but only a further 20 per cent by combining 15.

Item Type: Report
Uncontrolled Keywords: Alternative asset classes, portfolio diversification, diversifiable risk
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance

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