Optimal portfolio size for portfolio diversification : an empirical study on Singapore Stock Exchange.

Our study investigates the optimal number of securities one should hold in a portfolio, consisting of the securities listed on the Singapore Stock Exchange (SGX), for different investment horizons under a set of assumptions. Using the monthly returns of 50 securities listed on the main board of Singapore Stock Exchange (SGX) from 1st October 2005 to 30th September 2010, the relationship between the portfolio risk and the number of securities in the portfolio is examined. The analysis result shows that the optimal portfolio size is within the range of 4 to 6 for our period of study. Our result shows that systematic risk is high during the period of economic crisis due to an increase in the correlation of securities resulting in the diversification benefit to be reduced. Our study recommends that investors who lack sophisticated financial knowledge should not hold more than 6 stocks as diversification benefit is not significant when additional securities are added to the portfolio.BUSINES