The Diversification Puzzle

  title={The Diversification Puzzle},
  author={Meir Statman},
  journal={Financial Analysts Journal},
  pages={44 - 53}
  • M. Statman
  • Published 1 July 2004
  • Economics
  • Financial Analysts Journal
The levels of diversification in U.S. investors' equity portfolios present a puzzle. Today's optimal level of diversification, measured by the rules of mean–variance portfolio theory, exceeds 300 stocks, but the average investor holds only 3 or 4 stocks. The diversification puzzle can be solved, however, in the context of behavioral portfolio theory. In behavioral portfolio theory, investors construct their portfolios as layered pyramids in which the bottom layers are designed for downside… 
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