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Portfolio Size and Diversification

The basic notion of stock diversification involves spreading out the investment over more than one stock to avoid excessive exposure to a single source of risk. While all portfolio principles are directed towards achieving diversification to minimize risk, diversification is not a free lunch. Adding each single stock - into a portfolio - will definitely reduce the risk but increases the cost (of research: time, money & effort). So there is a trade-off between reduced risk due to better diversification versus the increased costs (decreased return) from adding additional securities to the portfolio. So what is the optimal portfolio size? The results from the study suggest that a very high degree of diversification is possible in India. A portfolio size of 10-15 stocks is found to be appropriate as the reduction in risk is only marginal there after.