Naïve Diversification of Investment Portfolio

Portfolios may be diversified in a naïve manner, without really applying the principles of Markowitz diversification, which is discussed at length in the next paragraph. Naïve diversification, where securities are selected on a random basis only reduces the risk of a portfolio to a limited extent. When the securities included in such a portfolio number around ten to twelve, the portfolio risk decreases to the level of the systematic risk in the market. It may also be noted that beyond fifteen shares, there is no decrease in the total risk of a portfolio.

Before discussing about portfolio diversification process, what the researches of investors and investment analysts have found is to be set out briefly. Firstly, they found that putting all eggs in one basket is bad and most risky. Secondly, there should be adequate diversification of investment into various securities as that will spread the risk and reduce it; if the numbers of them say 10 to 15 it is adequate to enjoy the economies of time, scale of operations and expertise utilized by the investors in his analysis.

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