Growing share price volatility means portfolios need as many as 50 stocks to be truly diversified, a...
Growing share price volatility means portfolios need as many as 50 stocks to be truly diversified, according to Threadneedle.
Richard Eats, communications director at the group, said the traditional textbook definition of achieving diversification via 25 stocks was no longer viable as individual equities become more volatile and less correlated with each other.
He cited a study by Professor John Campbell of Harvard University which found that specific factors in the US in 1997 accounted for 76% of individual stock volatility and sector and market for only 24%.
Eats suggested a number of possible factors for why individual shares and funds have become more risky, including growing activity of hedge funds and globalisation, meaning shares are more affected by international demand and by economic trends outside their domestic markets.
At the same time he claimed equity markets were far less volatile than many assumed.
He said this was because too many commentators looked at arithmetic graphs. Eats said in these graphs, if the market is at 100 and goes up 5%, it moves to 105, if it is at 1000 and goes up 5% it increases by 50 points However, he said, the fact that it is now shifting 50 points rather than five does not make it more volatile.
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