Selecting Optimal Portfolio in Pakistan

Abstract

This study aims to identify the number of stocks required to form a well-diversified portfolio in Pakistan. To identify the optimal number of securities we collected data from Bloomberg for the period of 2009-2015. Companies are randomly selected from the Pakistan Stock Exchange. The 40 portfolios are formed by adding different securities (without replacement) by assigning equal weights to all the securities. The study concludes that a portfolio of 20 securities can diversify significant amount of risk

How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature

“…From the results of previous studies presented in Table 1, we can conclude that the number of stocks required to achieve optimal diversification benefits is much smaller in emerging markets compared to developed financial markets (Gupta and Khoon 2001;Irala and Patil 2007;Stotz and Lu 2014;Ahuja 2015;Kisaka et al 2015;Bradfield and Munro 2017;Habibah et al 2018). When stock markets are as large as the U.S. financial market, one of the problems investors face is selecting appropriate stocks for the portfolio.…”

“…Most previous studies on diversification effects and portfolio size have focused primarily on developed markets, and relatively few studies have considered emerging markets (Gupta and Khoon 2001;Brands and Gallagher 2005;Irala and Patil 2007;Kryzanowski and Singh 2010;Alekneviciene et al 2012;Stotz and Lu 2014;Ahuja 2015;Tripathi and Bhandari 2015;Bradfield and Munro 2017;Fang et al 2017;Ahmed et al 2018;Habibah et al 2018;Norsiman et al 2019;Raju and Agarwalla 2021). It is obvious that there are a whole range of factors that distinguish emerging from developed markets, such as size, liquidity or regulation (Kiymaz and Simsek 2017).…”