RT Journal Article
SR Electronic
T1 Portfolio Concentration and Stock-Specific Risk
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP jpm.2023.1.467
DO 10.3905/jpm.2023.1.467
A1 Mahmoud Shammaa
A1 Stoyan V. Stoyanov
YR 2023
UL https://pm-research.com/content/early/2023/02/04/jpm.2023.1.467.abstract
AB In this article, the authors establish a connection between the effective number of portfolio constituents and the ex ante ratio of specific to total portfolio risk. Portfolios with a higher effective number of constituents have lower specific risk, and the decay follows a power law. An easy rule of thumb is that doubling the effective number of constituents approximately halves the proportion of stock-specific risk. The authors investigate the proportion of specific risk of the S&P 500 Index and find that in the period 2002–2022 the S&P 500 portfolio had a proportion of specific risk below the expected range, except for the post–COVID-19 period and that the ratio was never abnormally high.