The Optimal Tradeoff Between Diversification and Outperformance
The Optimal Tradeoff Between Diversification and Outperformance May 26, 2021 Warren Buffet once said that, “diversification is protection against ignorance”. Of course, the other side is true as well: strategies that aren’t adequately diversified run a substantially higher risk of ruin. The goal of this paper is to find a useful approximation for portfolio size that a. increases the potential for alpha (return over benchmark) at a constraint of b. minimal beta (volatility relative to benchmark). To explore this question, we look at S&P 500 stocks over the last three calendar years and...
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