A Comparative Study on the Impact of Portfolio Diversity

The Modern portfolio theory is considered to be one of the most significant approaches for portfolio management. The theory suggests using diversity for optimal investment opportunities and to minimize specific risk. Portfolio diversification reduces the impact of market fluctuations, improves the risk-adjusted returns and provides stability. On the contrary, too much diversification can lead to difficulties in keeping track of the stocks, unwanted tax complications and reduced gains during sudden spikes. Due to these factors, it is necessary to quantify the impact of diversification on portfolios. This paper is aimed at identifying and quantifying the impact of diversity on portfolios. For conducting this research, 2 portfolios have been developed with varying degrees of diversification. Performance indicators such as Beta, Jensen’s Alpha, Sharpe ratio, Sortino ratio, annualized returns, Value at Risk and Conditional Value at risk have been used in this research. The findings of this analysis show that in all aspects, the diversified portfolio outperforms the other. The diversified portfolio provides better returns per unit risk, higher overall returns, considerably lower risk in terms of volatility and lower value at risk. The comparative analysis illustrates that a diverse portfolio is substantially more favourable than an undiversified portfolio. The results of this study can help investors make decisions based on quantitative analytics and not based solely on advice. However, it should be noted that the stocks selected for this research are profitable on their own and additional research can be done for stock selection which has been addressed in concluding section